47.5. Reform of interest rate indices

A fundamental reform of major interest rate benchmarks is being undertaken globally, replacing some interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as ‘IBOR reform’).

A fundamental reform of the main interest rate benchmarks (the ‘IBOR reform’) is under way around the world. Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indexes used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48 / EC and 2014/17 / EU and Regulation (EU) No 596/2014 (hereinafter the ‘BMR Regulation’) sets out the operating rules and responsibilities of benchmark administrators and of the entities using these benchmarks. The new rules are to make the indicators more credible, transparent and reliable. As a result of the IBOR reform, individual indicators were adjusted to the new rules (eg WIBOR, EURIBOR) or liquidated (eg LIBOR) and replaced with alternative indicators. The greatest impact of the IBOR reform on the Group is observed in the field of financial instruments, in particular loans.

The main risks to which the Group is exposed as a result of the IBOR reform are operational: updating contractual terms, updating systems and reviewing control mechanisms related to the reform and regulatory risk. The impact on financial risk is mainly limited to the interest rate risk.

In 2021, a project was launched to prepare the Group for changes resulting from the reform, including the transition to alternative benchmarks. The key project tasks included: the selection of alternative indicators for liquidated reference indicators, the Group’s decisions on the use of new indicators, product inventory in terms of the use of liquidated indicators in the Group’s products and processes, preparation of the product change concept, update of ‘fallback’ clauses, the Group’s procedures to be followed in the event of the cessation of publication of the benchmark (the so-called ‘contingency plan’) and ordering communication with contractors about the IBOR reform. Key decisions were made by the Assets, Liabilities and Market Risk Committee (ALCO) and the Bank’s Management Board. For derivatives, the Bank has joined the ‘ISDA IBOR Fallback Protocol’ to transition to new benchmarks.

The Group has adopted internal regulations requiring all new loans and credits with variable interest to include fallback clauses in the event that the benchmark is discontinued. The clause contains a sequence of actions that the Group will take in the event of liquidation of a given ratio and does not indicate any specific alternative indicators, as in the Group’s opinion it is currently not possible and justified.

The Group monitors the progress of the transition to the new benchmarks by reviewing the total volumes of contracts where the current benchmark is subject to IBOR reform and an alternative benchmark has not yet been introduced (hereinafter ‘non-reformed contract’), even if the contract contains a fallback clause. At the same time, the Group continues the process of annexing contracts concluded before the entry into force of the BMR Regulation by introducing fallback clauses.

Following the recommendations of the supervisory authorities, the Group decided not to use the LIBOR ratios in newly granted loans and credits with variable interest rates.

As of 31 December 2021, the IBOR reform for the currencies to which the Group is exposed has largely been completed. The table below shows the IBOR to which the Group has had exposure, the new reference rates to which these exposures have or are transitioning, and the transition status.

In March 2021, the British Financial Conduct Authority (‘Financial Conduct Authority’, hereinafter ‘FCA’), as the supervisor of the authorized administrator of LIBOR indicators, announced that after 31 December 2021 the LIBOR CHF, LIBOR GBP, LIBOR EUR ratios for all tenors and USD LIBOR for 1W and 2M tenors are no longer developed or are no longer representative. USD LIBOR for remaining tenors will cease to be developed or will cease to be representative after 30 June 2023.

In accordance with the Commission Implementing Regulation (EU) 2021/1847 of 14 October 2021 on the designation of the statutory substitute for certain maturities of the LIBOR rate for the Swiss franc (CHF LIBOR), as of 1 January 2022, the reference rates of the SARON Compound family with the relevant the correction will be applied by operation of law in all contracts and financial instruments which, as at the date of the entry into force of the Commission Regulation, did not have adequate fallback clauses and which used the CHF LIBOR ratio so far. The introduction of substitutes by operation of law means in practice that it is not necessary to modify the content of financial contracts.

In accordance with British law, the FCA has been granted the right to amend the methodology for determining GBP LIBOR and to extend its development for a limited period in order to continue existing contracts using benchmarks which, for various reasons, the Group is unable to reform either by directly changing the benchmark or by the introduction and application of a tough legacy contracts (‘TLC’). The Group will apply this modified LIBOR to the existing contracts (TLC) using GBP LIBOR.

The European Commission has published an initiative that will define statutory substitutes for certain LIBOR rates for the British pound. The Group will monitor the progress of work under this initiative, while the Group is considering proposing to customers an annex removing the reference to LIBOR GBP.

In 2021, the Group took steps to amend all contracts based on the LIBOR EUR (a change to the appropriate EURIBOR was proposed). With regard to loan agreements that have not been amended by a relevant annex, the Group introduced new rules on interest rates in loan agreements from 1 January 2022 by applying the recently available value of the LIBOR EUR in 2021 and the margin specified in the loan agreement, while maintaining the existing rules and schedule of interest rate changes.

The Group has in its portfolio loan agreements and derivative transactions based on LIBOR USD with a maturity exceeding June 2023. With regard to loan agreement, the Group is considering proposing to customers an annex removing the reference to LIBOR USD. Some of derivatives transactions are registered with the CCP, while the remaining ones contain effective fallback clauses.

As at 31 December 2021, the Group prepared for the introduction in January 2022 of a change in the LIBOR CHF and LIBOR EUR ratios.

The tables below show the total amounts (in PLN thousand) of unreformed non-derivative financial assets and off-balance sheet liabilities granted as at 31 December 2021 and 31 December 2020. The amounts of non-derivative financial assets are presented in their gross carrying amounts, and off-balance sheet liabilities granted are presented according to the amount of liabilities.

The tables below present the total amounts (in PLN thousand) of unreformed non-derivative financial liabilities at the carrying amount as at 31 December 2021 and 31 December 2020.

The impact of the IBOR reform on hedge accounting is described in Note 23.

The table below presents the total amount (in PLN thousand) of unreformed derivative financial instruments as at 31 December 2021. The Group expects both legs of the FX swaps to be reformed simultaneously.