4.4 Interest rate benchmark reform

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 October 2023, the SC NWG Committee decided to change the maximum deadlines for the implementation of the Road Map, which assumes a bottom-up shift of the financial sector away from the use of WIBOR in favor of newly concluded contracts and financial instruments using a fixed interest rate or new RFR-type reference indicators. SC NWG indicated the final moment of conversion at the end of 2027.

As previously announced, on 31 March 2023, 1- and 6-month GBP LIBOR rates were published for the last time using the synthetic method. The publication of the 3-month synthetic LIBOR GBP rate will end at the end of March 2024. The Group is actively pursuing active transformations to remove the reference to GBP LIBOR in loan agreements.

In April 2023, the FCA decided to oblige ICE Benchmark Administration Limited (IBA), the administrator of LIBOR benchmarks, to continue to publish USD LIBOR rates for 1, 3 and 6 months using a non-representative ‘synthetic’ method. The publication of synthetic USD LIBOR rates will end on 30 September 2024. The Group’s portfolio includes loan agreements based on USD LIBOR with a maturity exceeding September 2024. In the field of loan agreements, the Group is considering proposing to clients an annex removing the reference to USD LIBOR.

The tables below show the total amounts of unreformed non-derivative financial assets and off-balance sheet commitments granted as at 31 December 2023 and 31 December 2022. The amounts of non-derivative financial assets are presented in their gross carrying amounts, and off-balance sheet commitments granted are presented according to the amount of liabilities.

The tables below present the total amounts of unreformed non-derivative financial liabilities at the carrying amount as at 31 December 2023 and 31 December 2022.

The table below presents the total amount of unreformed derivative financial instruments as at 31 December 2023 and 31 December 2022. 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.