Banks operating in the Egyptian market are heading to use the American Secured Overnight Financing Rate (SOFR) as a replacement of the London Interbank Offered Rate (LIBOR) in setting interest rates of dollar certificates.
The LIBOR has been widely used since the 1970s as a reference rate for various financial instruments. However, it will be permanently phased out by June 2023.
Last week, two separate meetings were held for bank officials in treasury and money management sectors; the first was with the Central Bank (CBE) officials, and the second was with the treasury and asset management committee of the Federation of Egyptian Banks and the ACI Egypt. The meetings aimed to develop a vision for setting savings vessels in foreign currencies, and the benchmark in this process.
Sources told Daily News Egypt that the first meeting was attended by CBE Governor Hassan Abdalla, CBE Deputy Governors Gamal Negm and Rami Abul-Naga, and CBE Sub-Governor for the Markets Sector Sally Refaat. During this meeting, Abdalla stressed the importance of promoting the financial market by re-introducing instruments that were previously prohibited in the Egyptian market, such as Derivatives and Options.
The meeting also discussed the pricing of savings vessels in foreign currencies, especially deposits and certificates in dollar, in light of the developments taking place in global financial markets, and the US Federal Reserve’s raising its interests to record levels, with expectations that this trend will continue in the coming period.
The rates of dollar deposits in banks were previously set based on the LIBOR rate over 3 months plus 1%, provided that the rates on dollar savings certificates did not exceed 2.25%. The meeting discussed the possibility of using the SOFR as an alternative to the LIBOR in setting rates of savings vessels in dollar at banks.
According to the sources, they agreed on the possibility of setting rates of dollar deposits for less than one-year on the basis of SOFR over 3 months plus a margin, and setting rates of dollar deposits for terms of more than one year on the basis of SOFR over one year plus a margin.
As for the savings certificates in dollar, it was agreed during this meeting to reset their rates in line with the dollar interest rates globally.
The Central Bank asked the treasury and money management officials who attended this meeting to discuss all these suggestions with the ACI Egypt and the treasury and asset management committee of the Federation of Egyptian Banks, to reach a final formula and send it to the Central Bank for final discussion and approval. Indeed, an expanded meeting was held between those parties.
According to the sources, the second meeting witnessed extensive discussions about the need to set maximum limits for dollar savings vessels’ rates. Officials of small-sized banks preferred this suggestion, so that they could compete in the market, while representatives of major banks refused it, and demanded not to set a maximum rate.
It was also discussed during the meeting the possibility of reducing the FX reserve ratio from 10% to 8% to help banks raise the interest rates on foreign currency deposits.
This meeting ended with an agreement that the treasury and asset management committee of the Federation of Egyptian Banks would draft a resolution and send it to the banks operating locally for discussion, in preparation for sending it to the Central Bank to take the appropriate decision regarding it. This process is scheduled to be completed this week.