Reforming Major Interest Rate Benchmarks: 2020 Progress report
Work to transition away from LIBOR needs to accelerate in early 2021.
This report covers reforms to a number of benchmarks, including the key London Inter-bank Offered Rate (LIBOR) benchmark.
During 2020, the disruption to global financial markets associated with the COVID-19 pandemic has further highlighted the fundamental weaknesses in LIBOR and reinforced the critical importance of the FSB’s efforts to reform the production and use of global interest rate benchmarks. While some aspects of firms’ transition plans have been temporarily disrupted or delayed, others have been able to continue, including the release by ISDA of new fallback language for derivative contracts and the publication of market conventions for loans and other products based on risk-free rates in a number of jurisdictions.
Given the extent of risks associated with a failure to prepare adequately for the transition, the onus of action is on firms. Global and national financial regulators will be monitoring progress closely. In October the FSB published a global transition roadmap for LIBOR. The roadmap sets out a timetable of actions for financial and non-financial sector firms to take in order to ensure a smooth LIBOR transition by end-2021.
With only one year left, all market participants – both financial and non-financial firms across the globe – must now ensure they follow the necessary steps to avoid disruption to the performance of their contracts. For transition to occur on time, market participants will need to cease use of LIBOR as a benchmark in all new activity across global markets as soon as possible and this needs to be a key priority for the months ahead.
There have been a number of proposals by authorities and national working groups including in the US, UK and EU to help manage an orderly wind-down of LIBOR and, in particular, provide a legislative solution for tough legacy contracts. However, market participants should continue to progress their transition efforts and plans proactively, particularly through active conversion and the insertion of robust and workable fallbacks where feasible.
Consistent with the above and emphasising the importance of action on this timetable, the administrator of LIBOR, ICE Benchmark Administration (IBA), on 18 November announced that it will consult on its intention that the euro, sterling, Swiss franc and yen LIBOR panels would cease at end-2021. Announcements in relation to US dollar LIBOR are expected to follow. In its role as regulator of IBA, the UK Financial Conduct Authority (FCA) has also set out its potential approach for use of new powers under proposed UK legislation to ensure an orderly wind down of LIBOR and published consultations on its proposed policies for using them.
FSB Official Sector Steering Group (OSSG) Co-Chairs Andrew Bailey and John C. Williams made the following statement: “The message that all market participants should take from this Report and this week’s announcements from the IBA and FCA is that we need to be prepared for the end of LIBOR. Everyone needs to be ready.
We thank all of our colleagues across the OSSG jurisdictions for their support in producing this report, and their commitment to redouble efforts on this issue next year as we approach the culmination of many years of hard work to strengthen the global financial system.”