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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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IBOR Transition and Fallback Provisions I (Dec 20)

IBOR Transition and Fallback Provisions I (Dec 20)

James Eves

30 years: Equity capital markets

In this video James Eves outlines what will happen to existing instruments that reference a LIBOR, such as  loans, bonds and derivatives. He highlights how issuance date is vital in determining what to do with a particular instrument. Finally, he outlines what a fallback is and its three components alongside ISDA recommendations.

In this video James Eves outlines what will happen to existing instruments that reference a LIBOR, such as  loans, bonds and derivatives. He highlights how issuance date is vital in determining what to do with a particular instrument. Finally, he outlines what a fallback is and its three components alongside ISDA recommendations.

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IBOR Transition and Fallback Provisions I (Dec 20)

9 mins 13 secs

Overview

The London Interbank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London.

Key learning objectives:

  • Understand the history of LIBOR

  • Define fallbacks and outline their three main components

  • Define Derivative Fallbacks

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Summary

Understand the history of LIBOR.

LIBOR began in 1969 as a way for banks to lend using a uniform rate, based on the level they would borrow from each other. After this rate had been developed, banks could then simply add a spread which represents the implied credit risk of borrowers. It became the main source for bonds looking for a floating rate rather than fixed. Today, while bonds and loans using LIBOR are estimated to be around $10 trillion globally, these are dwarfed by the notional derivatives outstanding at over $250 trillion.

But at the heart of this huge global total lies a number based largely on a group of banks estimates of a financing level they rarely actually use any more. Moving away from LIBOR seems logical, but the quest for a substitute that is liquid and tradeable in every market has resulted in a very different product. Daily overnight rates like SONIA, the UK’s Sterling Overnight Index Average; SOFR, the Secured Overnight Financing Rate used in the US,and Ester, the euro short-term rate used in the euro area.

Fallbacks and its 3 main components

Fallbacks generally have 3 key components:

  • Trigger event - what are the circumstances that result in a benchmark replacement?
  • The process - What is the path to identifying the replacement rate?
  • Adjustments -  What is the new rate, the spread adjustment and any other key terms?

What are Derivative Fallbacks?

A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets. When thinking about LIBOR, a very common derivative, for instance, is one that swaps fixed interest rate payments on a bond for floating, LIBOR related payments. Derivatives typically have fallback language from the 2006 ISDA definitions, through an ISDA master agreement.

What is ISDA?

ISDA (the International Swaps and Derivatives association) is the trade organisation for participants in the over-the-counter derivatives market. As a standard contract to enter into derivatives transactions, it has established the ISDA Master agreement.

ISDA has published language that supersedes all older ISDA definitions and which applies to new transactions by default, to help with enormous logistical challenges. They accomplish this through a 'protocol' that was introduced in October 2020 which will result in an automatic transition for all parties who have signed up.

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