Reforming major interest rate benchmarks: Progress report
This annual progress report on the transition to more robust financial benchmarks, emphasises that the continued reliance of global financial markets on LIBOR poses risks to financial stability and it calls for significant and sustained efforts by the official sector and by financial and non-financial firms across many jurisdictions to transition away from LIBOR by end-2021.
Interest rate benchmarks play a key role in global financial markets. In 2014 the FSB made recommendations to reform interbank offered rates (IBORs) in response both to cases of attempted manipulation and to the decline in liquidity in key interbank unsecured funding markets.
The report sets out progress on implementing the FSB recommendations and finds that:
- There is a common view across FSB jurisdictions that the use of overnight risk-free rates should be encouraged across global interest rates markets where appropriate, and that contracts referencing IBORs should have robust fallbacks.
- There has been good progress in many derivatives and securities markets, but transition in lending markets has been slower, and needs to accelerate.
- Firms undertaking their transition away from LIBOR should not delay their programmes until the emergence of possible forward-looking term versions of risk-free rates.
- The parallel efforts on transition across multiple jurisdictions and currencies are an opportunity to align conventions and other practices across currencies and products.
- Transition requires significant commitment from the official sector, working alongside market participants.
- Given the degree of risk arising from the continued reliance on LIBOR, regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches
The FSB announced on 17 December, as part of its 2020 work programme, that it will conduct a survey of exposures to LIBOR and supervisory measures being taken to address benchmark transition issues, in order to improve collective understanding of LIBOR transition progress so far and to increase awareness of the importance of ensuring timely transition.
The FSB will deliver to G20 Finance Ministers and Central Bank Governors in July 2020, and publish, a report on remaining challenges to benchmark transition.