News / 08.10.2021

Risk free interest rates

Author(s) Hans-Christian Donjem & Peter L. Brechan

What happens in Norway with NIBOR, and what are the legal restrictions on banks introducing alternative rates?

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Background

From 1 July 2023 LIBOR will cease to be published for all currencies, and all interest periods starting on or after 1 January 2022 must have an alternative interest calculation.

The intention of this article is to address the effects for NIBOR as the transition to alternative Interest Free Rates (RFRs) gathers momentum.

What will happen to NIBOR

Norske Finansielle Referanser AS( NoRe) is the administrator of NIBOR and is owned by Finance Norway, the industry organisation for the financial industry in Norway. Global Rate Set Systems (GRSS) is the calculation agent based on input from 6 banks in the Norwegian market, 5 of which are branches of Scandinavian banks.

For GBP SONIA (Reformed Sterling Overnight Index Average) has been chosen to replace LIBOR. In the US SOFR (Secured Overnight Financing Rate) has been chosen  for USD and for EUR €STER (Euro short-term rate) has been published since 2 October 2019. All these interests are overnight rates, and SONIA and €STER are also unsecured.

On 20 September 2019 it was recommended by a working group to replace NIBOR with NOWA (Norwegian Overnight Weighted Average). NOWA already exist but is backward looking as opposed to NIBOR. NOWA is currently calculated as a weighted average of the interest rate on unsecured overnight loans between banks in Norwegian kroner. Lending of more than NOK 10 million is reported by the currently 11 panel banks. There is a requirement for data from at least 3 panel banks and a minimum total transaction volume of NOK 1 billion. The administration of NOWA is with the central bank of Norway, Norges Bank, and NOWA is based on the IOSCO Principles for financial benchmarks.

Any replacement of NIBOR with NOWA as general reference rate will require a decision by the Norwegian financial regulator, appointed as regulator under the Norwegian implementation of the Benchmark Regulation (2016/1011). Once the banks quoting NIBOR change their focus and stop quoting, a decision to replace it with NOWA may be expected quickly. Subsequent to this it is expected that Norway will nominate NOWA to replace NIBOR as a critical benchmark under the Benchmark Regulation 2016/1011.

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Implementation of alternative interess rate calculation

In agreements governed by Norwegian law or with Norwegian borrowers a replacement of an IBOR requires in principle agreement, even without any change in margin.

Even if an agreement is subject to foreign law and jurisdiction, assistance by local courts in enforcement may be required in connection with any collection procedure towards Norwegian borrowers, guarantors or security providers. Norwegian law has a general reservation with respect to judgments or agreements that may lead to an “ordre public” situation if the result of the agreement/judgment is regarded as offensive to the rule of law in Norway. This means that Norwegian law may in essence be applicable irrespective of a different choice of governing law and jurisdiction in an agreement.

The standard LMA provision commonly used in both foreign and Norwegian law loan agreements have since September 2020 included specific rate switch provisions, but even earlier templates used often include alternative rate calculation provisions, albeit often inteded to be used for individual rate calculations and not on a replacement basis.

This means that agreements without specific rate switch provision are subject to agreement with the borrower. However, if an IBOR rate has been replaced legally under the provisions of the Benchmark Regulation it may be argued that the new RFR shall apply. Notice should be taken that this may lead to net margin for a lender being different as many alternative RFR are more aligned to the central bank rates for that currency than IBOR is, which normally leads to alterative RFRs being lower than an IBOR for the same currency.

In Norway the Financial Agreements Act stipulates that a lender may change the interest level with prior notice. This act is generally declaratory for non-consumers, so applicability depends on an understanding of the interest calculation provision of the loan agreement and to what extent a  lender has waived the right to amend the terms of the agreement unilaterally.

Haavind’s highly qualified lawyers have extensive experience from various areas of banking and finance law and regularly assists lenders, borrowers, issuers and other parties with the legal framework of all types of financial transactions. Do not hesitate to contact us should you need any assistance related to interest rates specifically or banking and finance law generally.

Should you have any questions related to IBOR transition, take contact with the authors.