The Bangladesh Bank has drafted a policy on introducing a new reference rate for short-term trade financing before the Financial Conduct Authority of England phases out the London Interbank Offered Rate.
The central bank on Tuesday published the draft policy.
Introduced in 1984 by the British Bankers Association, LIBOR has been serving as a key benchmark for short-term (overnight to one year) interest rates worldwide.
The rate is being used for an estimated $3 trillion dollars in financing.
The FCAE has taken an initiative not to publish the LIBOR rate after 2021 after it revealed a wide range of misuses of the rate by different means.
The world’s lenders, including banks and other financial institutions, use LIBOR as the benchmark reference for determining interest rates for various debt instruments, including trade financing.
According to the Federal Reserve and regulators in the United Kingdom, LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate.
As part of the phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.
In the circumstances, the BB has come up with the draft policy and sought comments from stakeholders for setting up an alternative reference rate.
The draft policy has focused on short-term trade financing for which presently six-month LIBOR plus 3.50 per can is applicable.
The policy has allowed, besides LIBOR, a benchmark rate in the currency of financing with prescribed mark up for discounting or early payment of export bills.
It has relaxed six-month fixed tenure by allowing flexibility depending on the credit period for financing.
In the absence of a forward looking rate like three-month and six-month, the relative rate may be compounded in arrears to calculate an effective rate for the tenure of credit, the draft said.
The draft policy has allowed introducing an Islamic Shariah-based benchmark rate for Shariah-base financing.
The policy will be applicable to permissible usance import under supplier’s or buyer’s credit.
Respective benchmark rates may, in case of necessity for phasing out LIBOR, would be applied during the credit period as per mutual understanding with the lenders concerned.
The authorised dealers have been asked to refrain from arranging LIBOR-dependent financing as and when global discourse is published with regards to the deadline for its usability, the draft said.
The treasury head of a leading local bank said that the BB took a timely step to cope up with the LIBOR transition.
He, however, said that the banks would have to go through some complexities during the transition.
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