In the global financial market, financial products and transactions that are based on the London Interbank Offered Rate (“LIBOR”), the most ubiquitous market interest rate, are prevalent. LIBOR is a benchmark interest rate that is used for the pricing of banking products globally, e.g. loans, bonds, commercial papers and derivatives. LIBOR is a forward-looking rate calculated using reference interest rates submitted by participating banks. However, many factors distorted LIBOR between 2008 to 2012 (including the LIBOR Scandal circa 2012, in which bankers at several major financial institutions colluded to manipulate LIBOR and caused distrust in the financial industry), which gradually led to the phasing out of LIBOR.  

Consequently, on 5 March 2021, the Financial Conduct Authority (“FCA”), a financial regulatory body in the United Kingdom which regulates and supervises the LIBOR benchmark, made an announcement regarding the end of LIBOR; and that all LIBOR settings would either cease to be provided by any administrator or no longer be representative, as follows:

- Immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, as well as the 1-week and 2-month US dollar settings; and

- Immediately after 30 June 2023, in case of the remaining US dollar settings (i.e. the overnight, 1-month, 3-month, 6-month and 12-month US dollar settings).

It is further noted that after 31 December 2021, it would be permanent cessation for all euro LIBOR settings; all Swiss franc LIBOR settings; the spot next, 1-week, 2-month and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings. On 16 November 2021, the FCA has confirmed it will allow the temporary use of a ‘synthetic’ Japanese yen LIBOR rate (for 1-month, 3-month and 6-month Japanese yen LIBOR settings) and a ‘synthetic’ sterling LIBOR rate (for 1-month, 3-month and 6-month sterling LIBOR settings) in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of 31 December 2021, until the end of 2022 to allow more time to complete transition. Moreover, although five US dollar LIBOR settings will continue to be calculated by panel bank submission until 30 June 2023, the FCA has confirmed that the use of US dollar LIBOR will not be allowed in most new contracts written after 31 December 2021.

The cessation of LIBOR would have an impact on the Thai financial market in that the Thai Baht Interest Rate Fixing (“THBFIX”), being widely used as a reference rate for floating rate products (e.g., derivatives, notes and loans) as well as for mark-to-market valuation, will be ceased after 30 June 2023 since it uses USD LIBOR as a component for calculation. To mitigate and prepare for such impact, the Bank of Thailand (“BOT”), as the THBFIX administrator, has established a modified version of THBFIX as the fallback rate for THBFIX, which can be referred to as the “Fallback Rate (THBFIX)”, to temporarily replace THBFIX. However, according to the BOT, the Fallback Rate (THBFIX) is intended to be used as a stopgap only in THBFIX legacy contracts until the end of 2025.

In April 2020, in order to establish an alternative reference rate that can represent local financial market conditions, the BOT and its steering committee have established the Thai Overnight Repurchase Rate (“THOR”), which is calculated and determined from the volume-weighted average of qualifying transactions in the overnight private repurchase market, as a new reference rate for both derivatives and cash products. It is further suggested by the BOT that any new transaction which is entered into should apply THOR as the interest rate in order to facilitate the transition from THBFIX to THOR.

Even though THOR is backward-looking, it represents a de facto ‘executed’ rate backed by valid transactions as opposed to THBFIX, in which its LIBOR component is based on a ‘quoted’ rate. THOR is calculated based on the data of actual transactions and can only be fixed after the related period. In other words, the interest due would only be known on the last day of the interest period. As a result, it is worth noting that even if THOR would help reflect the actual financial market conditions and hence promote transparency, it would be challenging to determine the interest in advance, which could ultimately affect the term of repayment because lender’s side may not have adequate time to calculate and set the interest payments.

In terms of the contractual aspect, for contracts which currently apply THBFIX (i.e. legacy contracts), it is suggested that the contractual parties should explore whether their contracts contain any fallback provisions because the said reference rate will be ceased after 30 June 2023. As mentioned above, for legacy contracts, the Fallback Rate (THBFIX) may be applied until the end of 2025; however, for long-term legacy contracts which will continue for an extended period even after the absence of THBFIX, it is advisable to amend such contracts to apply THOR in place of THBFIX. As for new contracts which will be entered into before the cessation of THBFIX, it is suggested that the contractual parties should start considering applying THOR in order to avoid impact from THBFIX cessation.

This is intended merely to provide a regulatory overview and not to be comprehensive, nor to provide legal advice. Should you have any questions on this or on other areas of law, please contact the following:

Nuttaros Tangprasitti                                                  

Pimsiri Harnpanicharoen

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