Global Interest Rate Benchmark Reform

Significant enhancements have been made to the methodologies of major inter-bank offered rate (“IBOR”) benchmarks in recent years motivated by two factors:

1. The shift by banks towards forms of wholesale funding beyond interbank deposits, resulting in the need for IBOR benchmark methodologies to be enhanced in order that such benchmarks remain representative of actual funding costs for banks; and
2. An increase in coordination and guidance regarding the design, administration, and governance of benchmarks by central banks and regulators, and international supervisory organisations, including for the purposes of alignment with International Organization of Securities Commissions (“IOSCO”) principles.

An Enhanced Methodology for SAIBOR

Under the direction of the regulator and central bank of the Kingdom of Saudi Arabia, SAMA, a technical working group was established in 2018 involving the panel banks for the Saudi Arabian Interbank Offered Rate (“SAIBOR”) and Refinitiv Benchmark Services (UK) Limited (“Refinitiv”) as benchmark administrator of SAIBOR (the “Technical Working Group”). The Technical Working Group was tasked with considering enhancements to the methodology of SAIBOR to improve its robustness and bring it in line with international benchmark standards (the “Enhanced Methodology”).

The current methodology of SAIBOR relies on a panel of contributing banks submitting rates at which they would be able to borrow unsecured interbank funds in Saudi Riyals, were they to accept offers in reasonable market size from other banks in the SAIBOR panel at 11:00am KSA. There is no waterfall in the current methodology.

The Enhanced Methodology developed for SAIBOR introduces a waterfall to be used by the existing panel of contributing banks when making submissions. This waterfall is designed to ensure SAIBOR is anchored in transactions where possible and can be determined in a wide range of market conditions. In addition, a spread percentage will be added to reflect that SAIBOR is representative of the offered side of the market whereas the underlying transactions involve a wide range of counterparties and are typically representative of the bid side of the market. The spread percentage has been calculated based on the historical spread between SAIBOR and the bid side of the market overall tenors over five years. 

For further details on how SAIBOR will be calculated using the Enhanced Methodology please refer to the Public Consultation as published by Refinitiv dated as of [15 November 2021].  The final Enhanced Methodology will be published on Refinitiv’s website upon completion of the consultation process at www.refinitiv.com.  For the avoidance of doubt, this communication refers to the final Enhanced Methodology as published by Refinitiv (and such methodology as amended from time to time thereafter).

The implementation of the Enhanced Methodology is expected to be done gradually over a period of several weeks. The transition period will begin on or about [2nd January 2022] whereupon the publication of SAIBOR will be moved by one hour from 11:00am KSA to 12:00pm KSA (subject to any delay procedure to be specified in the Enhanced Methodology).

If you wish to discuss this further with us, please contact your respective Relationship Manager or contact us at ibor@baj.com.sa for any query related to the SAIBOR transition.