What is WIRON and will it affect transfer pricing?

Not long ago, the global financial market was heavily discussing the topic of LIBOR index being replaced with a new interest rate. In Poland, the process of replacing the reference rate is underway and is scheduled to be completed in late 2024/early 2025.

Our local change and the replacement of WIBOR and WIBID by WIRON may not be discussed so loudly, but it is still very important for the Polish market. Therefore, we would like to explain to you what the WIRON index is and how a change in the reference rate can affect transfer prices.

WIRON explained

WIRON[1], until recently referred to as WIRD[2], is an index calculated on the basis of actual transactions made by entities with financial institutions (banks) and large companies. This distinguishes it from the WIBOR index which is being discontinued since it is determined on transactions and forecasts of the interbank market.

This undoubted advantage of WIRON, i.e. reflecting the actual transactions of entities active in the market, reduces the dependence of the index value on sudden changes in NBP interest rates. On the flip side, it also means that WIRON will react with a delay to declines in such rates.

When is the change due?

As with the LIBOR migration, WIRON will not replace the existing rate overnight. The schedule for the reform is consistent with the expected Roadmap for the process of replacing the WIBOR and WIBID:

starting 2023:

• the WIRON index is available and usable in financial instruments for entities that want to use the index in their settlements,
• in parallel with the products offered so far (WIBOR-based), banks can introduce loans based on the WIRON index into their offers,
• there are products offered on the market, including loan products for entrepreneurs (companies) with WIRON-based interest rates,

starting 2024:

• offers from banks and others include WIRON-based products, including ones for consumers, sole proprietorships and partnerships,
• in the debt market, issues of own bonds are made, including bank and corporate bonds using the WIRON index or a fixed interest rate,

at the end of 2024 and starting 2025:

• the calculation and publication of the WIBID and WIBOR reference rates will be terminated,
• once the Regulation of the Minister of Finance becomes valid, financial institutions will convert existing contracts and instruments that use WIBOR, taking into account the rules set forth in the Regulation.

WIBOR vs. WIRON

If you look at historical data, the WIRON index (for 1M, 3M, 6M tenors) remains below WIBOR. In addition, WIRON quotes – contrary to WIBOR – are lower than the values of the NBP reference rate (conclusion based on data for 2022 and 2023), which has been at 6.75% for more than half a year.

For current and historical index data on the index, go to administrator’s websites: WIRON and WIBOR.

The administrator of the WIRON index (as in the case of WIBOR) is a company that is part of the GPW (Stock Exchange) group: GPW Benchmark S.A.

WIRON vs. TP

The change in the reference rate in Poland will affect not only transactions with financial institutions, but also financial transactions (loans, cash pooling, bonds or derivatives) between businesses, including related parties. In particular, this applies to transactions that have been or will be made based on WIBOR- or WIBID-based variable interest rates.

Therefore, when entering into new financial transactions, we recommend that you consider determining their terms using the new index. As for continuing contracts, we already now suggest to determine which of them require a change in the provisions relating to the adopted benchmarks.

However, the business changes described above are not all. Changed reference rates and terms of transactions between related parties will also trigger the need to modify the transfer pricing procedures or policies in place. Also, new benchmarking analyses will be necessary.

We also wanted to remind you that the Minister of Finance’s announcement, already in effect as of January 1, 2023, defining the type of basis rate and margin for financial transactions being the pre-condition for the safe harbor in 2023, allows for the use of WIRON 3M index.

[1] Warsaw Interest Rate Overnight

[2] Warsaw Deposit Market Index