The Reserve Bank of India (RBI) has issued an advisory to banks and financial institutions, asking them to be prepared for the transition from the London Interbank Offered Rate (LIBOR).

The directive follows a 5 March decision of the UK’s Financial Conduct Authority (FCA) stating that all LIBOR settings would either cease to be provided by any administrator or would no longer be representative post December, 2021.

This led the RBI to ask banks and financial institutions to "cease entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by 31 December 2021."

The financial institutions, RBI suggested, should incorporate robust fallback clauses in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings.

The RBI has also advised the financial institutions to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, latest by 31 December 2021.

In August 2020, the RBI had asked banks to frame a board-approved plan, outlining an assessment of exposures linked to LIBOR and the steps that were to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the ARR.

In the case of Pound sterling, Euro, Swiss franc and Japanese yen settings, the cut off date is 31 December 2021. While certain US dollar LIBOR settings will continue to be published till 30 June 2023, the extension of the timeline for cessation is primarily aimed at ensuring roll-off of USD LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR.

"It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), contracted on or before December 31, 2021," the RBI said.

The central bank has also asked banks and financial institutions to incorporate robust fallback clauses, preferably well before the respective cessation dates, in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the respective LIBOR settings.