Funder Terms (the “Terms”)
“Approved Currency” means Euros (EUR), British Sterling (GBP) and United States Dollars (USD).
“Benchmark Rate” means, where the relevant Approved Currency is USD (United States dollar), (a) the applicable SOFR Screen Rate published two US Banking Days before the date of payment (or such other time or day as determined by Bank if the market practice differs); or (b) if the SOFR Screen Rate is not available for that interest period for a period of 5 US Banking Days (during which time the most recently available SOFR Screen Rate shall be used (to the extent there is one)) and a replacement for the SOFR Screen Rate has not been notified to Supplier as a replacement Benchmark Rate, then the percentage rate per annum which is the aggregate of: (i) the Federal Bank Rate prevailing before the date of payment as determined by Bank; and (ii) the applicable Federal Bank Rate Adjustment (rounded if necessary to four decimal places with 0.00005 being rounded upwards). For GBP (British sterling), (a) the applicable SONIA Screen Rate at or around 12.00pm London time on the date of payment (or such other time or day as determined by Bank if the market practice differs) or, (b) if, in any case, the SONIA Screen Rate is not available, the percentage rate per annum which is the aggregate of: (i) the Central Bank Rate prevailing at that time; and (ii) the applicable Central Bank Rate Adjustment, rounded if necessary to four decimal places with 0.00005 being rounded upwards. For Euros, (a) the Euro interbank offered rate administered by the European Money Markets Institute (or any successor administrator of that rate) for that period (or the nearest period either side of that period for which a rate is published, interpolated as necessary in accordance with Bank's standard practices) as displayed on the applicable Reuters screen (EURIBOR01), at or about 11am Brussels time One Target Days before the start of that period, or, (b) if it is not possible to calculate under (a) for at least 5 Business Days (during which time the most recently available calculation under (a) shall be used (to the extent there is one)), the sum of ESTR and the ESTR Spread (provided that Bank determines use of ESTR is possible in compliance with applicable law or regulation), or (c) if it is not possible to calculate under (b) for at least 5 Business Days (during which time the most recently available calculation under (b) shall be used (to the extent there is one)), the sum of the ECB Rate and the ECB Spread
In each case, if such rate is less than zero, the Benchmark Rate shall be deemed to be zero.
“Business Day” means a day where Banks are opened for Business in New York, London and Paris.
“C2FO Fee” means, for each Approved Invoice paid prior to the Invoice Settlement Date confirmed by Buyer, an amount equal to: (1) the approved amount (less any relevant credit notes applied, where relevant) confirmed by Buyer multiplied by (2) 0.50%, divided by (3) a 360 or 365 day year as is determined by Bank to be customary for the relevant currency in the local interbank market, multiplied by (4) the Tenor.
“Central Bank Rate” means the Bank of England’s base rate as published by the Bank of England from time to time.
“Central Bank Rate Adjustment” means, in relation to any payment date, the mean of the spreads (expressed as a percentage rate per annum) over the five most immediately preceding London business days for which the SONIA Screen Rate has been published of (a) the SONIA Screen Rate for that period on that day; and (b) the Central Bank Rate prevailing at close of business on that day, as calculated by Bank excluding the highest spread (or, if there is more than one highest spread, only one of those highest spreads) and lowest spread (or, if there is more than one lowest spread, only one of those lowest spreads).
“Discount” means, for each Approved Invoice paid (prior to the Invoice Settlement Date confirmed by the Buyer), an amount equal to: (a) the approved amount (less any relevant credit notes applied, where relevant) confirmed by the Buyer multiplied by (b) the Discount Rate, divided by (c) a 360 or 365 day year as is determined by Bank to be customary for the relevant currency in the local interbank market, multiplied by (d) the Tenor.
“Discount Rate” means, unless Bank notifies Supplier of a different rate in writing, a percentage, calculated as the sum of (A) the percentage interest using the relevant Benchmark Rate on the date of payment of the purchase price for the relevant Approved Currency, plus (B) a margin of 2.0%.
“ECB Rate” means the fixed rate for the main refinancing operations of the European Central Bank or, if that rate is not published, the minimum bid rate for the main refinancing operations of the European Central Bank, each as published by the European Central Bank from time to time.
“ECB Spread” means the rate per annum which is the mean of the spreads over the five most immediately preceding Business Days for which EURIBOR has been published of EURIBOR and the ECB Rate prevailing at close of business on that Business Day; provided that if such rate is less than zero it shall be deemed to be zero.
“ESTR” means, for any amount and any period, the forward looking euro short-term rate (ESTR) published by an authorised benchmark administrator and displayed on a screen or other information service, each as selected by Bank for that period (or the nearest period either side of that period for which a rate is published, interpolated as necessary in accordance with Bank's standard practices) at approximately such time and date before the start of that period as Bank shall determine.
“ESTR Spread” means the rate per annum which is the median difference between EURIBOR and the euro short-term rate administered by the European Central Bank (or any other person which takes over the administration of that rate) published by the European Central Bank (or any other person which takes over publication of that rate) compounded for the same tenor over a five year look-back period calculated by Bank as at the date falling  Business Days before the first day of the interest period in accordance with the formula for calculation of spread adjustment set out in the IBOR Fallback Rate Adjustments Rule Book dated 22 April 2020, as updated from time to time, jointly published by the International Swaps and Derivatives Association and Bloomberg Index Services Limited; provided that if such rate is less than zero it shall be deemed to be zero.
“Federal Bank Rate” means, for any day, (a) the short-term interest rate target set by the U.S. Federal Open Market Committee as published by the Federal Reserve Bank of New York from time to time; or (b) if that target is not a single figure, the arithmetic mean of: (i) the upper bound of the short-term interest rate target range set by the U.S. Federal Open Market Committee and published by the Federal Reserve Bank of New York; and (ii) the lower bound of that target range provided that a reference to a Federal Bank Rate shall include any successor rate to, or replacement rate for, that rate.
“Federal Bank Rate Adjustment” means, in relation to any payment date, the mean of the spreads (expressed as a percentage rate per annum) over the five most immediately preceding US Banking Days for which the SOFR Screen Rate has been published of: (a) the SOFR Screen Rate for that interest period on that US Banking Day; and (b) the Federal Bank Rate prevailing at close of business on that US Banking Day, as calculated by Bank excluding the highest spread (and, if there is more than one highest spread, only one of those highest spreads) and lowest spread (or, if there is more than one lowest spread, only one of those lowest spreads).
“HSBC Group” means HSBC Holdings plc and its subsidiaries and associate undertakings including any of their branches.
“Invoice Settlement Date” means the date (which may differ from the invoice due date) identified by Buyer (or determined using Buyer agreed parameters, based on criteria such as Buyer’s payment scheduling) as the date for settlement of the relevant approved amount; for the avoidance of doubt if the relevant date identified is not a Business Day, then it shall be deemed to have been identified as the next following Business Day.
“SOFR Screen Rate” means the Term SOFR (secured overnight financing rate) reference rate published by CME Group Benchmark Administration Limited for a period equal in length to the Term, provided that: (a) if no reference rate corresponds to the Term, Bank may determine the rate by reference to any published reference rates at its discretion, and (b) if CME Group Benchmark Administration Limited ceases to publish such reference rate, Bank may specify another source which publishes the Term SOFR reference rate.
“SONIA Screen Rate” means the Term SONIA (sterling overnight index average) reference rate published by ICE Benchmark Administration Limited for the relevant period, provided that: (a) if no reference rate corresponds to the Term, the Bank may determine the rate by reference to any published reference rates at its discretion, and (b) if ICE Benchmark Administration Limited ceases to publish such reference rate, Bank may specify another source which publishes the Term SONIA reference rate.
“Target Day” means any day on which the Trans-European Automated Real-time Gross Settlement Express Transfer payment system is open for the settlement of payments in euro.
“Tenor” means the number of days from the date of any Invoice Purchase paid by Bank to Supplier to the Invoice Settlement Date (inclusive).
“US Banking Day” means a day on which commercial banks are open for business in the State of New York other than (a) a Saturday or Sunday and (b) a day on which the Securities Industry and Financial Markets Association (or any successor organisation) recommends that the fixed income departments of its members be closed for the entire day for the purposes of trading in US Government securities.
- Buyer (or C2FO on its behalf) may provide details to Bank for Approved Invoices and advises the approved amount, Invoice Settlement Date and other additional information required to enable Bank, at its discretion, to effect Supplier’s requested Invoice Purchase. Supplier will use C2FO’s Service to view Approved Invoices and make any request for Invoice Purchase.
- If Bank elects (in its sole and absolute discretion) to make an Invoice Purchase, the purchase price shall be the relevant approved amount less (i) the Discount and the C2FO Fee, (ii) other fees and charges notified to Supplier (if any) (iii) any credit notes. If Bank elects not to make an Invoice Purchase, C2FO may notify Supplier. If Supplier is not paid by the Invoice Settlement Date or Supplier has queries relating to deductions and/or Invoice Settlement Dates, any such enquiries should be directed to Buyer or C2FO.
- All purchases shall be subject to the Discount and the C2FO Fee deducted from the approved amount before making payment. Other fees and charges (if any) will be deducted from the approved amount (and any relevant credit notes taken in to account) before making payment.
- Fees and charges may change from time to time and will be notified to Supplier in writing (which may include by email) and are in addition to any fees and charges Supplier may incur with its account holding bank and/or intermediary banks.
- Invoice Purchases shall be made by Bank on a non-recourse basis. On payment of the purchase price, Supplier immediately transfer all rights, title and interest in the relevant Approved Invoice to Bank and Supplier will provide all documents (if any) and do (or allow to be done) anything which Bank deems necessary to effect, perfect, protect or preserve the ownership transfer to Bank in respect of the relevant Approved Invoice. Supplier shall mark its books and computer records accordingly in relation to purchases made by Bank in connection with the corresponding Approved Invoice.
- Without affecting the C2FO Terms, Bank may terminate these Terms (or parts thereof) immediately on notice to Supplier and C2FO (effective on receipt). Supplier may terminate these Terms upon written notice to and written acknowledgement from Bank and C2FO. Any rights and obligations that accrued before termination under these Terms will survive and all Invoice Purchases prior to termination will continue to be governed by these Terms.
- Supplier may not assign or transfer these Terms or the right to receive payment from Bank without the prior written consent of Bank. Bank may (i) assign or transfer any of its rights or obligations under these Terms, or (ii) enter into sub-participation arrangements and/or other risk mitigation in relation to these Terms, in each case with any person without Supplier’s consent.
- Bank may replace or make amendments to these Terms which will become effective on the expiry of 10 days’ notice to Supplier, which may be by email. However, Bank may, in exceptional circumstances, make amendments to these Terms at any time in order to comply with any law or regulation, which will become effective immediately on notice to Supplier.
- Supplier acknowledges, agrees, warrants and represents to Bank that:
- it is and will remain fully compliant with all laws and regulations applicable to it and no insolvency proceedings or process has been commenced by or against it;
- its involvement in the supply chain finance program with Buyer has not violated and shall not violate any applicable anti-bribery and corruption laws and regulations including, but not limited to any relevant provision in force in the jurisdiction where it and Bank are domiciled and operate;
- neither it nor any of its subsidiaries, directors, officers, employees, agents, or affiliates is an individual or entity (“Person”) that is, or is owned or controlled by Persons that are subject of any Sanctions or located, organised or resident in a Sanctioned Jurisdiction;
- it will not, directly or indirectly, use any benefit derived from the supply chain finance program to support any activities or business of or with any Sanctioned Person, or in any Sanctioned Jurisdiction; or in any other manner that would result in a violation of Sanctions by any Person;
- it confirms compliance and will comply in all material respects with foreign and domestic laws and regulations relating to Sanctions, anti-money laundering, export controls and any required import or export licenses, pertaining to each jurisdiction in which it operates and to each Approved Invoice, and will promptly notify Bank of any circumstance in connection with an Approved Invoice that may relate to money laundering, terrorist financing, bribery, corruption, tax evasion or Sanctions;
- Bank shall be entitled to refuse, stop or cancel any Invoice Purchase and/or take any action to protect Bank’s interest in the event that any representation or warranty given by Supplier is inaccurate or untrue;
- where it has confirmed an email address for receipt of encrypted emails from Bank, Bank may, at its discretion, send encrypted emails to Supplier with such information or notices as Bank deems necessary or appropriate (including but not limited to relevant payment information identifying Approved Invoices, approved amounts, date of payment and the correlating net amount paid (after fees and charges) and notices envisaged in these Terms). Terms and conditions apply to the use of Bank’s encrypted emails solution, Securemail, which Supplier will need to agree separately in order to receive the emails. Bank shall not be liable to Supplier (or any third party, including Buyer) in any circumstance for any error or omission in any email it issues to Supplier;
- in the event that any payment made by Bank renders Supplier liable to any tax (including without limitation any value added, sales, withholding or other tax), levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) imposed by any government or other taxing authority) due or imposed in any jurisdiction, Bank shall not be liable in relation to, nor responsible for, any claim made by Supplier relating to its liability for such tax in any circumstances;
- it agrees that Bank may make any deduction on account of tax Bank is required to make by any local or foreign tax or regulatory authority from or in respect of any payment made to Supplier, or to another person at its request or instruction, in connection herewith or any purchase and Bank may pay the amount deducted to the relevant tax or regulatory authority;
- it indemnifies Bank against any loss, damage, cost, expense or liability Bank incurs or suffers as a result of (i) any breach by Supplier of the Terms and (ii) any applicable tax being assessed on, payable by or claimed against Bank arising out of or in connection with these Terms and payments Bank makes to Supplier (excluding any relevant income tax imposed on Bank), including (but not limited to) any value added, sales, withholding, stamp duty, registration or other similar tax; Supplier must pay any amount it owes under this clause within five days of demand by Bank;
- no claim shall be made by Supplier or any of its officers, directors, employees, agents, representatives or advisers against any member of the HSBC Group or C2FO or any of their respective officers, directors, employees, agents, representatives or advisers for any special, indirect, punitive or consequential damages in respect of or arising from breach of contract or any other theory of liability relating to or connected herewith; all such claims are waived and released;
- at any time that transfer of ownership in respect of an Approved Invoice purchased by Bank is not perfected and/or enforceable by Bank directly without Supplier’s involvement, Supplier holds that Approved Invoice on behalf of and, to the extent permissible and recognised under relevant laws, on trust for Bank and will promptly account to Bank on receipt of any relevant recoveries in respect of it;
- no third party holds or will hold an interest (including, but without limitation, any ownership or security interest) in Supplier invoices submitted to Buyer or debt represented thereby;
- all payments made by Bank shall be made based on the information provided to Bank by Buyer and C2FO; Bank shall be under no obligation to check the account details provided to it by Buyer and/or C2FO. To the extent that any issue arises related to the amount paid, set‑off, counterclaim, credit notes, deduction or withholding, it will be a matter for Supplier and Buyer to determine;
- It is the agreed intention to permit C2FO to be able to collect the C2FO Fee in respect of use of its platform in respect of each Invoice Purchase, and the C2FO Fee will be deducted from the relevant approved amounts before any Invoice Purchase payment is made to Supplier by Bank in this regard, Supplier confirms to Bank that:
- C2FO has made disclosure of the arrangement to the Supplier and Supplier has acknowledged and agreed to it and that, when making any Invoice Purchase, Bank is authorised to take into account the C2FO Fee which will be paid by Bank to C2FO;
- neither Buyer or C2FO has exerted improper pressure or used improper means to require or influence Supplier to agree to receiving Invoice Purchases from Bank or to agree the C2FO fee arrangement or to these Terms; and
- it is aware and acknowledges that no service is provided by Bank (whether directly or indirectly) to Supplier in respect of the collection / accounting of the C2FO Fee (for the account of C2FO) to be borne by Supplier;
- it acknowledges and accepts that no communication or action by Bank: (a) is undertaken as, or in connection with a service provided by HSBC Group to Supplier, save for services negotiated separately with HSBC Group and/or for another purpose (if applicable); and/or (b) should be taken to mean that Supplier is a “customer” of HSBC Group or to be taken to mean that Supplier is entering into a business relationship with HSBC Group, or that HSBC Group is carrying out a transaction for Supplier or on Supplier’s behalf. All activities undertaken by Bank (including liaison with Buyer and C2FO and communication sent by or received from Bank whether through C2FO or otherwise) arise out of supply chain finance provided by Bank to Buyer and Bank is, at all times, acting as Buyer’s agent and/or service provider.
- unless otherwise provided for herein, a person who is not party to these Terms may not enforce them under the Contracts (Rights of Third Parties) Act 1999; Supplier and Bank may agree to change any of the Terms without the consent of any person who is not party to it;
- it acknowledges and specifically consents to Bank (i) engaging with C2FO to collect, exchange, process, transfer or disclose data (including personal data) and to share, store or transmit information (including personal data) for the purposes of exercising its rights and/or obligations under the Terms, and (ii) disclosing information (including personal data) to C2FO where necessary or desirable to give effect to the Terms;
- it acknowledges that Bank may, as necessary or appropriate to facilitate use of C2FO’s Service by Supplier and persons authorised by it, transfer and disclose relevant information (including personal data) globally, to C2FO and any member of the HSBC Group, and such recipient may also collect, process, transfer and disclose such information for the same purpose;
- it shall ensure that every person or entity in respect of which personal data is provided by Supplier (or by anyone else on its behalf), or will be from time to time provided by Supplier, to Bank, C2FO or to another member of the HSBC Group has been notified of and agreed to the collection, processing, disclosure and transfer of their information (including to or from C2FO) before their information is provided. Supplier shall at the same time advise them that they have rights of access to, and correction of, their personal data;
- it acknowledges and agrees that, as regards processing of personal data, Bank acts as controller in respect of such processing, and it is not intended that Bank shall act as a processor in respect of any personal data;
- it acknowledges that C2FO is independent from Bank and nothing in these Terms shall constitute a partnership, joint venture or other form of association between C2FO and Bank; Bank assumes no liability or responsibility whatsoever relating to C2FO’s Service including, without limitation, in relation to (i) any unavailability of the Service for any reason, (ii) Supplier’s use of the Service, and (iii) any delay, malfunction or data error relating to the Service; and
- it confirms that it has read and agreed to the C2FO Terms in respect of its Service; this includes, without limitation, Supplier’s agreement to any limitations of liability, disclaimers or other terms that limit Supplier’s rights in relation to C2FO.
- The following disclosure provisions survive termination and are binding for 3 years after a valid termination:
- Supplier permits Bank to pass on information it receives in connection herewith: (a) to Bank's actual or proposed successors and assigns; (b) to any company in the HSBC Group; (c) to Bank's professional advisers; (d) to any rating agency or actual or proposed insurer or other provider of credit protection to Bank; (e) to any person with whom Bank has or may enter into sub-participation arrangements and/or other risk mitigation in respect of any risks or rewards under purchased Approved Invoices; (f) to any person whom Bank reasonably considers necessary to obtain receipt of payment of any Approved Invoices purchased by Bank; (g) as required by law or to any court or regulatory, supervisory or governmental authority; or (h) to a federal reserve or central bank, provided that, for disclosure under (a), (b), (c), (d), (e) or (f) above, the party to whom disclosure is made is bound to keep that information confidential and use it only for the purpose for which it is disclosed;
- Supplier undertakes to provide Bank on request with any information or documentary evidence about its tax status or the identity or tax status of any of its ultimate or any intermediate owners that Bank considers (acting reasonably) is needed to comply (or demonstrate compliance or avoid non-compliance) with any HSBC Group member's obligations to any local or foreign tax or regulatory authority (the "Tax Information");
- Supplier authorises (and undertakes on request to obtain written authority or consent of any of its ultimate or intermediate owners for) any member of the HSBC Group to disclose its or its ultimate or any intermediate owners' Tax Information (as applicable), information about these Terms and any Approved Invoices and the link between these Terms and Approved Invoices and Supplier or its ultimate or any intermediate owner(s) to any local or foreign tax or regulatory authority; and
- nothing in these Terms obliges Bank to act or refrain from acting in any way that might cause breach of any legal or regulatory requirement, contractual obligation or Bank policy or harm Bank's or the HSBC Group's reputation.
- These Terms are governed by the laws of England and Wales. Supplier and Bank each irrevocably submit to the exclusive jurisdiction of the courts of England and Wales in respect of any proceedings which may be initiated in connection with these Terms.
- In agreeing to these Terms, Supplier confirms that:
- it has read or viewed and understood any relevant fact sheet, video or other materials provided to it as part of the on-boarding process;
- it has agreed to the C2FO Terms;
- all relevant information about Supplier as provided to Buyer is accurate or Supplier has notified any relevant changes to Buyer;
- it has read and understood the relevant deductions that will be made in respect of Approved Invoices prior to Invoice Purchase;
- the person agreeing to these Terms has the necessary authority and capacity to confirm acceptance of these Terms on Supplier’s behalf;
- it has taken all necessary steps to authorise agreement to and performance of these Terms; and
- the agreement to these Terms and the granting of such authorisations as may be necessary are in accordance with the applicable constitutional documents of Supplier’s organisation.
- In choosing to accept these Terms electronically and selecting the “I accept” or “I agree” option:
- Supplier consents to use of electronic communications, to receiving notices and communications electronically and to utilising electronic signatures in lieu of using paper documents; the electronic signature service is accessible via a relevant link on the Site;
- Supplier acknowledges: (i) it is not required to receive notices and disclosures or sign documents electronically and may request to receive paper copies and withdraw consent (given at (a) above) for any future receipt or signing at any time, by notifying Bank and C2FO; (ii) it may download certain documents, including these accepted Terms, and print them (viewing and printing will require that Supplier has compatible software); (iii) if it requires paper copies, Supplier may request the same be provided by Bank (and Bank will confirm any fees associated to providing paper copies);
- Supplier agrees that (i) the individuals accessing C2FO’s Service and subsequently accessing and accepting these Terms (via the relevant link on the Site or otherwise) are authorised to execute, for and on Supplier’s behalf, all agreements that are being furnished to Supplier electronically via C2FO or a link available on the Site; (ii) any such agreement executed in this fashion shall be binding and considered, in connection with any transaction, to be “in writing”, “signed” and to constitute an “original” when printed from electronic files or records established and maintained in the normal course of business; (iii) Supplier will not contest the validity or enforceability of any such agreement under the provisions of any applicable law relating to whether certain agreements are to be in writing, must be physically signed or whether the relevant individual(s) are authorised to execute any such agreement; and (iv) Supplier will not contest admissibility of records executed or created through C2FO’s Service or a link available on the Site on the basis that records executed or created were not done so in documentary form; and
d. Bank shall be entitled to rely on and assume that Supplier accepting this document electronically is valid, effective and enforceable execution and/or, to the extent permitted by law and necessary to do so, may treat purported execution by this method as deemed acceptance of the content.
Interest Rate Disclosure
The following is provided for general information only and you should conduct your own independent research and analysis regarding the risks involved in conjunction with your legal, tax and/or accountancy advisors. The statements below are not exhaustive. Whilst HSBC receives updates from regulators as to their expectations, there are events relevant to benchmark rates which are not yet known. Accordingly, HSBC cannot give any statement about the likelihood of any specific outcome or its potential impact on any transaction, nor is HSBC providing any advice or recommendation.
What is LIBOR? The London Interbank Offered Rate (“LIBOR”) is an interest rate benchmark often used, directly or indirectly, to determine the interest payable under banking products including to calculate relevant early payment discounts. In addition to LIBOR, calculation methodologies of some other benchmarks may be linked to LIBOR and these benchmarks may be directly or indirectly impacted as a consequence of LIBOR transition.
What’s changing? LIBOR is subject to national and international regulatory guidance and reform. Examples of recent regulatory and industry led guidance and proposals include:
- On 5 March 2021, the Financial Conduct Authority (FCA), the UK regulator of LIBOR , announced that all LIBOR settings for all currencies will either cease or no longer be representative immediately after (i) 31 December 2021, for GBP, Euro, Swiss Franc and Japanese Yen LIBOR settings in all tenors, and US Dollar LIBOR 1-week and 2-month settings; and (ii) 30 June 2023, for US Dollar Overnight, 1-month, 3-month, 6-month and 12-month settings.
- On 29th September 2021 the FCA published notices confirming its decision to compel the continued publication of 1, 3 and 6 month GBP and JPY LIBOR settings after the end of 2021, using a 'synthetic' methodology. These rates will be available for use from January 2022 in some legacy facilities but not new facilities.
- The FCA also indicated it will consider the case for continued publication after 30th June 2023 of USD 1, 3 and 6 month settings taking into account the views and evidence from US authorities and other stakeholders.
- In accordance with UK regulators requirements at the end of March 2021 we have ceased all new issuance of GBP LIBOR referencing facilities that expire after the end of 2021.
- US regulators have informed banks to stop entering into new USD LIBOR facilities as soon as practicable and in any event by no later than 31st December 2021.
- For EURIBOR, unlike LIBOR, there is currently no regulatory guidance that the rate will cease to be published. The underlying calculation methodology of EURIBOR has been reformed to ensure it is benchmark regulation compliant. Any demise of EURIBOR would follow an industry consultation process with appropriate implementation timelines. Fallback provisions may be included to address what happens should EURIBOR become temporarily or permanently unavailable in the future.
- In March 2021 Ippan Shadin Hojin JPA TIBOR Administration (JBATA) confirmed its intention to retain JPY LIBOR and discontinue Euroyen TIBOR at the end of December 2024. JBATA further announced that they will continue to consider fallbacks for TIBOR. If relevant, your terms may require amendment to reflect any recommended fallback provisions.
- Financial regulatory authorities are encouraging the use of “Risk Free Rates” or “Near Risk-Free Rates” (RFRs) which have been developed as alternative interest rate benchmarks. RFRs are typically backward looking overnight rates based on actual transactions and reflect the average of the interest rates that certain financial institutions pay to borrow overnight on an unsecured basis from wholesale market participants (for unsecured RFRs, such as SONIA) or the average rate paid on secured overnight repurchase or “repo” transactions (for secured RFRs, such as SOFR). RFRs do not include or imply any credit or term premium of the type seen in LIBOR or EURIBOR; however, RFRs are not truly free of risk; RFR’s can rise or fall as a result of changing economic conditions and central bank policy decisions.
Why are we sending this to you? As you are in receipt of terms from us that use LIBOR and/or that use an RFR to calculate discounts, you should be aware of the potential impact of these changes. You may use this information alongside the other information published by regulators to assist you and your advisers in deciding whether a different payment solution is more appropriate.
What are the key differences? The RFR interest rate benchmarks for GBP and US dollars are SONIA and SOFR respectively. For JPY, EUR and CHF the RFR interest rate benchmarks are TONA, ESTR and SARON. These RFRs are overnight rates based on actual historic transactions. They are published at the end of the overnight borrowing period. LIBOR is a ‘term rate’ which means it is published for different periods of time (e.g. 3 or 6 months) and is a ‘forward looking’ rate which means it is published at the beginning of the borrowing period and remains the same for that period. It is important to note:
- the manner of adoption, calculation and application of RFRs for early payment discounts may differ compared with the application, calculation and adoption of RFRs in other products, such as the bond and derivatives markets;
- for some settings and currencies, LIBOR may continue to be published on a synthetic and non-representative basis;
- the adoption, calculation and application of a RFR could result in differences to the economics over the duration of the discounting and mean that amounts payable are lower or higher than using a LIBOR or other interest rate benchmark; you should ensure you speak to your advisers to understand the consequences of this;
- using a RFR where interest is calculated using one calculation methodology (e.g. RFR compounded in arrears), could mean that amounts payable are lower or higher than using an alternative interest rate benchmark or a RFR calculated using a different methodology (e.g. forward looking term RFR);
- you may find that different currencies will use different interest rate benchmarks for calculating interest and the methodologies and conventions for each will differ e.g. a facility with EUR and GBP may utilise EURIBOR for EUR and a RFR for GBP; you should consider the impact this may have on you from an operational perspective;
- you may find that different products will use different methodologies and conventions for calculating interest e.g. a loan facility may use a compounding in arrears methodology whilst a trade facility may use a forward looking term or a simple overnight rate; you should consider the operational impacts this may have on you;
- RFR interest rate calculation conventions will likely require your internal treasury, accounting and payment systems to be enhanced in order for you to manage the servicing of these products in an accurate, efficient and timely manner;
- future changes to market practice or conventions relating to the use of RFRs could potentially be adverse to your interests, require you to make changes to the documentation you have executed with us or to other administrative and operational changes you have already made; these further changes could result in you incurring additional costs;
Forward looking Term RFRs
o Forward-looking SONIA term rates are being published by a number of providers. These may be calculated by a provider using a different methodology to other providers and may result in differences in the rates published by the providers. Following regulatory guidance SONIA term rates, are only likely to be suitable for use in trade finance facilities and a limited range of loan facilities;
o Forward-looking SOFR term rates are being published by The CME Group Benchmark Administration Ltd. These do not have the same regulatory limits on use cases that Term SONIA has and are supported for use across a broad range of lending and trade products;
o Term RFRs are typically based on derivatives (typically Swaps or Futures) on overnight RFRs and therefore include future rate expectations but not interbank credit risk. The quality and stability of a term RFR is a function of derivative market liquidity and therefore these rates are different to the RFRs themselves and pose additional risks in their use, representativeness and potentially their availability;
o If these derivative markets on which term RFRs are typically based are not consistently as large as overnight wholesale lending markets, those term RFR rates cannot be as robust as overnight RFRs;
o Term RFRs might be affected by a spike in derivative prices on the particular day the rate is taken with this rate being fixed and used to calculate interest for each day in the interest period. When using overnight RFRs on the other hand, daily rates are typically averaged over the number of calendar days in the interest period meaning any one-day spike in rates would have a significantly smaller impact on interest calculated.
o Forward-looking term RFRs may not be available in every currency, particularly those where there is no active and liquid derivatives market e.g. CHF SARON.
On 29th September 2021 the FCA confirmed that to avoid disruption to legacy facilities that reference 1, 3 and 6 month GBP and JPY LIBOR settings, it will require the LIBOR benchmark administrator to publish these settings under a ‘synthetic’ methodology, based on RFRs, for the duration of 2022. These 6 LIBOR settings will be available only for use in some legacy facilities from January 2022, and are not for use in new business. In September 2021 the FCA launched a consultation on which legacy contracts can use these synthetic rates.
The FCA has confirmed that the methodology for calculating these ‘synthetic ‘rates will be: (a) ICE Term SONIA provided by ICE Benchmark Administration for GBP and the Tokyo Term Risk Free Rate (TORF) provided by QUICK Benchmarks Inc., adjusted to be on a 360 day count basis, for JPY) plus (b) the respective ISDA fixed spread adjustment (that is published for the purpose of ISDA’s IBOR Fallbacks for the 6 LIBOR settings)
These 6 LIBOR settings will become permanently unrepresentative of their underlying markets from 1st January 2022.
The application of ‘synthetic ‘LIBOR’ to a loan and/or trade facility could mean that amounts currently being paid under that facility change. These could be higher or lower than currently.
Notwithstanding the above, the regulatory expectation is that users of LIBOR should continue to focus on active transition rather than relying on synthetic LIBOR. Given this and the temporary nature of ‘synthetic’ LIBOR it is important that you address transition and the timing of this in the context of the options available to you.
What’s the impact for you? It is possible that use of a RFR may result in changes to the early payment amounts payable. Those amounts might be lower or higher than would have been payable if LIBOR had applied. Where an RFR is used, fallback provisions will be included to address unavailability of an RFR as an interest rate benchmark. The fallback provision may vary by jurisdiction and may result in changes to the discount amounts, which may be higher or lower than would have been payable under the RFR.
If you are using a derivative product to hedge your early payments or for other purposes, the fallback interest rates that may apply may no longer match and could result in your position ceasing to be hedged appropriately by that product. Furthermore, in the event of a restructuring or termination of any associated hedging product(s) you have with HSBC or another hedging provider, a payment may be due from you to HSBC or that hedging provider. Such payment may be significant.
Where can I find further information? We are unable to provide specific advice or recommendations on this issue. We strongly recommend you seek guidance from your usual professional advisors if you have any questions. Further information is available at: www.business.hsbc.com/ibor.