Reforming major interest rate benchmarks
This report sets out progress on implementation of the FSB’s 2014 recommendations to reform major interest rate benchmarks such as key interbank offered rates (IBORs). The 2014 recommendations included measures to strengthen benchmarks and other potential reference rates based on interbank markets, as well as developing alternative nearly risk-free benchmark rates (RFRs). The recommendations were made following examples of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets.
The progress report concludes that IBOR administrators have continued to take important steps to implement the FSB’s recommendations. These measures have included steps to adjust methodologies used to calculate benchmark rates. However, the report finds that in the case of some IBORs, such as LIBOR and EURIBOR, underlying reference transactions in some currency-tenor combinations are scarce and submissions therefore necessarily remain based on a mixture of factors including transactions and judgement by submitters. Regulators have taken a number of steps to address these issues, including developing powers to require mandatory contributions to benchmarks, but it remains challenging to ensure the integrity and robustness of benchmarks and it is uncertain whether submitting banks will continue to make submissions over the medium to long-term.
Regulators in some FSB jurisdictions have made good progress in supporting workstreams focused on identifying new or existing RFRs that could be used instead of IBORs in a range of contracts, in particular derivatives. However, limited progress has been made to date on migration from major IBORs to RFRs even where they are already available. The 2014 FSB report did not set a deadline for promoting transition to RFRs where appropriate; however, questions surrounding the long-run viability of some IBORs, such as LIBOR, underline the importance of those transitions. For those jurisdictions that intend to more proactively promote the use of RFRs it is important that momentum is maintained to fulfil the FSB’s RFR recommendations.
The official sector has also engaged actively engaged with the International Swaps and Derivatives Association (ISDA) to tackle the risks associated with permanent discontinuation of widely used IBORs. ISDA has established a series of working groups to tackle the risks associated with permanent discontinuation of widely used IBORs and is drafting fall-back arrangements for new derivatives contracts and a future protocol to amend existing contracts. The official sector places great importance on all industry stakeholders, on both the buy and sell side, entering into such protocols. It is also important that work on contract robustness is extended to other non-derivative markets where contracts reference IBORs such as mortgages, loans, floating rate notes and futures contracts.
The FSB will publish another progress report in 2018.