4.4. Interest rate benchmark reform

[Financial notes are presented in PLN thousand]

A fundamental reform of the main interest rate benchmarks (the ‘IBOR reform’) is under way. 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 (e.g. WIBOR, EURIBOR) or liquidated (e.g. 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 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.

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 July 2022, at the request of financial market participants, the Office of the Polish Financial Supervision Authority established the National Working Group for Benchmark Reform (‘NWG’). The aim of the NWG is to prepare the process of effective implementation of the new reference index on the Polish financial market and to replace it with the currently used reference index of the WIBOR interest rate in such a way as to ensure the safety of the financial system.

In September 2022, the Steering Committee of the National Working Group (‘SC NWG’) selected the WIRON index as an alternative to WIBOR. WIRON is the Warsaw Deposit Market Index – a transactional index developed on the basis of deposit transactions concluded by data providers with financial institutions and large enterprises. WIRON has been published by GPW Benchmark since the beginning of August 2022. Ultimately, WIRON is to become a key interest rate reference indicator within the meaning of the BMR Regulation, which will be used in financial contracts, financial instruments and by investment funds. In the course of the work of the NWG, the tasks required to be performed by market participants were identified, prioritized and time-consuming were estimated in order to correctly and safely replace the previously used WIBOR reference indicators with the new indicator.

In 2023, it is planned to verify the premises for the occurrence of a regulatory event in accordance with Article 23c sec. 1 of the BMR Regulation. The regulatory event will be the basis for appointing in the regulation of the Minister of Finance, under the statutory procedure, a replacement for the key reference index WIBOR. Pursuant to the regulation of the Ministry of Finance, the replacement will apply to contracts and financial instruments that meet the conditions set out in the BMR Regulation. The regulation of the Ministry of Finance will also define the corrective factor (“spread’) and the date from which the substitute will be applied.

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. With respect to loan agreements, the Group is considering proposing an annex to the Clients removing the reference to LIBOR GBP.

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.

The Group has in its portfolio loan agreements and derivative transactions based on LIBOR USD with a maturity exceeding September 2024. 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.

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 2022 and 31 December 2021. 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 2022 and 31 December 2021.

The table below presents the total amount (in PLN thousand) of unreformed derivative financial instruments as at 31 December 2022 and 31 December 2021. The Group expects both legs of the FX swaps to be reformed simultaneously.

As part of the established hedging relationships, the Group identifies the following interest rate benchmarks: WIBOR, EURIBOR. As of the reporting date, these benchmarks rates are quoted and available each day and resulting cash flows are exchanged with its counterparties as usual.

In the case of EURIBOR the Group assessed that, there is currently no uncertainty about the timing or amounts of cash flows arising from the IBOR reform. The indicator has been adapted to the requirements of the European Union Benchmark Regulation (BMR Regulation) and are developed by Administrators with the approval of supervisory authorities. The Group not anticipate changing the hedged risk to a different benchmarks.

In the case of WIBOR, in the Group’s opinion, there is uncertainty as to the dates and amounts of cash flows for the new index. Such uncertainty may affect the assessment of the effectiveness of the relationship and the high probability of the hedged item. For the purposes of these assessments, the Group assumes that the interest rate benchmark on which the cash flows from the hedged item and/or hedging instrument are based will not change as a result of the WIBOR reform.

The list of hedging relationships and the nominal amounts of hedging instruments designated thereto, which may be affected by the cessation of the LIBOR interest rate benchmarks is presented in Note 22.

Regarding the hedging instruments, the Group joined ISDA Fallbacks Protocol and actively cooperates with counterparties in order to implement rules of conduct in line with the ISDA methodology.