Markets around the world are gearing up for this alternative reference rate following an announcement from the UK Financial Conduct Authority on 5 March that LIBOR will either cease to be provided by any administrator or will no longer be a representative rate. The decision came after revelations that banks were rigging the rate, which was a prevalent benchmark in the past five decades.
The bank said on Tuesday that HSBC’s financing, a combination of rupee-denominated term loan and documentary credit, was given to Brookfield Renewables, one of the world’s largest pure-play renewable energy platforms for importing solar panels .
Documentary credit—a mode of payment that protects both the exporter and importer in trade finance dealings—is exempt for a period of about three years using SOFR. It also marks HSBC’s first project financing in the solar energy segment in India. However, the bank did not disclose the size of the deal citing customer confidentiality.
The trade financing was executed last week through HSBC Group’s branch at GIFT City in Ahmedabad.
“This transaction is yet another reaffirmation of our capabilities and market expertise amidst the changing environment. Amitabh Malhotra, Head of Global Banking, HSBC India, said, “We look forward to working closely with our customers across various industry transitions.
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Were among the first few lenders to carry out transactions involving SOFR.
The Reserve Bank of India is asking banks to explore an alternative reference rate from the end of 2020 as the global issuance of new LIBOR contracts expires on December 31. RBI is also encouraging banks to stop using the Mumbai Interbank Forward lump sum rate. MIFOR), which is benchmarked to LIBOR.
SOFR is based on actual transactions as opposed to the old reference rate and is a comprehensive measure of overnight cash borrowing costs in the US repo market. Therefore, it is known as a more accurate measure of cost of borrowing.