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Timeline for TRLIBOR to TLREF Transition is Announced

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Timeline for TRLIBOR to TLREF Transition is Announced

Brief Analysis to Switch From TRLIBOR to TLREF-Turkish Lira Overnight Reference Rate

According to the recent announcement by the Turkish Banks Association, studies on benchmark interest rates conducted under the auspices of the National Committee have been concluded, resulting in the transition period from TRLIBOR to TLREF-Turkish Lira Overnight Reference Rate shall be effective as of 1 July 2022.

As a brief history, TRLIBOR started to be announced in line with the Board of Director’s decision of the Turkish Banks Association dated 16.04.2002 to eliminate the problem that banks in the Republic of Turkey do not have a reference interest that can be taken as a basis both in their transactions between themselves and their transactions with customers.

However, due to the negativities related to LIBOR, which has been used as the benchmark interest in the pricing, valuation and clearing of financial instruments in transactions, in line with the global benchmark interest rate reforms, the Republic of Turkey also embarked on studies to switch to risk-free transactional rates.

It was announced on 30 July 2020 through a public press by the National Working Committee consisting of ministries, regulatory bodies and participating banks that the application and publication of the Turkish Lira Interbank Sales Ratio (TRLIBOR), which is monitored and published by the Turkish Banks Association, will be terminated within a reasonable period, and to be replaced by TLREF.

Accordingly, since 2019, Borsa Istanbul has calculated and published the Turkish Lira Overnight Reference Rate (TLREF) to establish a Turkish Lira reference interest rate that can be used as a benchmark in debt market instruments, financial derivatives and various financial contracts.

TLREF aims to enable long-term Turkish Lira loan use/disbursement, ensure that consumption and investment transactions are less affected by interest rate fluctuations, and increase the diversity of financial products.

Finally, in accordance with the announcements made to the public by the Turkish Banks Association dated 25 May 2022, within the scope of the benchmark interest rate reform, the IBOR transition process and the Turkish Lira Overnight Reference Rate TLREF studies carried out by the National Working Committee have been concluded. The schedule announced is as follows;

  • Last published date for TRLIBOR: 30 June 2022,
  • TRLIBOR/TLREF transition spread rate announcement: 1 July 2022,
  • The transition of living TRLIBOR-indexed transactions to TLREF: 1 July 2022.

As per the impact of such transition; most of the banks have already made almost identical announcements on their websites for their customers, basically stating that the transition process to TLREF would eventually affect natural and legal persons who use financial products indexed to IBOR in transactions with the bank and/or plan to transact with such financial products.

The main financial products that will be affected by the transition from IBOR to TLREF are; derivative products, floating-rate loans, deposits and securities, respectively.

According to the banks, possible effects on customers would be;

  • While IBORs are based on unsecured transactions, Risk-Free Rates, as in the case of TLREF, are based on secured transactions in repo markets. In this framework, Risk-Free Interest Rates can be determined at a lower level than IBORs; therefore, an equalization margin on the Risk-Free Interest Rate will replace IBOR in the contract to prevent additional economic consequences compared to IBOR in current transactions for/against one of the parties may need to be added.
  • While there may be a change in the frequency of publication of Risk-Free Interest Rates, the timing of the determination of the interest rate (such as at the end of the payment period) may differ, as well as the methodology for calculating interest; both in existing and new transactions and contracts. For this reason, there may be changes in the interest amounts paid in the current floating rate transactions and contracts the customers have made with the banks.
  • As IBOR will be replaced, adding a “contractual reserve interest provision” in existing contracts governing the transition process may be necessary.
  • During the transition period, “legal reserve interest rates” to be applied to contracts and legal transactions can be determined by regulatory institutions/authorities. In case of disagreement or between the parties regarding the “contractual reserve interest provision“, the application of the aforementioned “legal reserve interest rates” may come to the fore.

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