SWESTR and STIBOR – current status
STIBOR is still the relevant reference rate for Swedish krona widely used in connection with various financing transactions. Currently no resolutions have been passed to cease the publication of STIBOR. STIBOR is also a critical benchmark under the Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016. Swestr is a transaction-based reference rate, which has been published since September 2021. Swestr is intended to be used as an independent alternative for traditional interbank rates but it is also used as a component in a recommendation for calculating a so-called fallback rate to be used for STIBOR.
We have previously written short articles and updates on the Riksbank starting to calculate and publish Swestr (Swedish krona Short Term Rate), a transaction-based reference rate calculated by the Riksbank on the basis of transactions executed on the money market from one banking day to the next in Swedish kronor. Following a test period in the beginning of 2021, from 2 September 2021 onwards Swestr could have been used as a reference rate in financial contracts. Today the Riksbank provides also compounded average rates and an index based on Swestr. The publication of Swestr is linked to global transition from the interbank offered rates to transaction-based risk-free rates. Therefore, in a long run, the Riksbank considers that STIBOR should cease for all maturities and be replaced by Swestr. In order to achieve this, the Riksbank has, inter alia, recently set up a forum of financial market participants to gain a better understanding as to what is needed for the transition.
Transition from the interbank offered rates to risk-free rates entails a risk for value transfer between contractual parties because unlike interbank offered rates risk-free rates do not comprise risk for longer dated funds or credit risk between banks. Therefore, in order to avoid value transfers, risk-free rates are usually calculated as the aggregate of the risk-free rate and a spread adjustment between the risk-free rate and the interbank offered rate. In the global markets this spread has typically been calculated as a historical median calculation based on the difference between the relevant interbank offered rate and the risk-free rate over a five-year lookback period. As Swestr has not been available prior to September 2021, there is no such five-year historical references available for difference between Swestr and STIBOR. Therefore, in November 2021 the Riksbank published historical estimates for Swestr indicating what values would have been recorded historically. However, we are yet to see that the transaction-based reference rate, Swestr plus spread adjustment would have been widely used in the Swedish loan markets, and currently a commonly used and acknowledged spread adjustment for various tenors are not available in the Swedish markets. It may still take years until the transition from STIBOR to Swestr is completed and Swestr becomes the generally used reference rate.
On the other hand, the work to make STIBOR compliant with the Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 (the “Benchmark Regulation“) has continued. In accordance with the Benchmark Regulation incorporation of contractual understanding on replacement rates, so called “fallback” clauses, is a requirement for contracts regarding financial instruments and contracts regarding consumer credit. Therefore, in December 2022 the Swedish Bankers’ Association provided a recommendation for a fallback rate for STIBOR, which is based on Swestr. The recommendation is three-fold wherein the first recommendation is regarding triggering events meaning events upon the occurrence of which the contract parties should move away from Stibor. Such events include, inter alia, the supervisory authority (i.e. the Financial Supervisory Authority (Finansinspektionen)) or the administrator of STIBOR (i.e. Swedish Financial Benchmark Facility AB) announcing that publication of STIBOR has ceased or will cease, or the supervisory authority announcing that STIBOR is not representative of the underlying market and that this representativeness will not be restored or that it will be illegal to use STIBOR in financial contracts. The triggering events are broadly in line with the rate replacement events set out e.g. in LMA’s template for facility agreements. The second recommendation is in respect of the replacement rate which is suggested to be adjusted Swestr plus spread adjustment. The third recommendation is in respect of timing of the switch to the replacement rate, which is recommended to occur at the latest in connection with the first date for interest determination following the cessation of STIBOR.
Further, in order to comply with the requirements set out by the Benchmark Regulation for administrators of the critical benchmarks, the Swedish Financial Benchmark Facility lodged an application with the Financial Supervisory Authority in the end of December 2021 in order to be authorised as an administrator under the Benchmark Regulation prior to the deadline in the end of the year. During the application process STIBOR can be used as a reference rate for existing and new financial contracts.
It can also be noted that the calculation method of STIBOR is to change due to the underlying Market Adjustment Factor data sources used for STIBOR being replaced. The change of data source for Market Adjustment Factor calculation is a minor amendment and implies no changes for the panel banks nor in any processes by the administrator. The relevant change of data source will be reflected in the updated STIBOR Calculation Methodology document which will come into force on 19 September 2022.
