LIBOR and other benchmarks
Ensuring the integrity and reliability of major financial market benchmarks, particularly interest rate and foreign exchange (FX) benchmarks, is important for financial stability.
Interest rate benchmarks
Interest rate benchmarks play a key role in global financial markets. To ensure financial stability, benchmarks which are used extensively must be especially robust.
In July 2013, in response to cases of attempted manipulation and declining liquidity in key interbank unsecured funding markets, the FSB established an Official Sector Steering Group (OSSG), which comprises senior officials from central banks and regulatory authorities. Through the work of the OSSG, the FSB first published recommendations in 2014 to strengthen confidence in the reliability and robustness of interest rate benchmarks and identify alternative near risk-free rates. The FSB, through the OSSG, has worked continuously since then to coordinate action at the international level to encourage and support the transition away from LIBOR to new, more robust, benchmarks.
As of end-2021, all GBP, EUR, CHF, and JPY LIBOR panels, as well as the 1-week and 2-month USD LIBOR settings, ceased. In April 2022 the FSB welcomed the smooth transition to robust alternative rates across global markets, primarily overnight risk-free or nearly risk-free rates (RFRs). The absence of any significant market disruptions is a testament to the magnitude of market participants’ efforts and the level of attention from the regulators and industry bodies to support the transition to RFRs.
While key panel-based USD LIBOR settings will continue until end-June 2023, this is intended to support the run-off of a substantial portion of legacy contracts. Given the significant use of USD LIBOR globally, the FSB emphasises that firms must have plans in place to ensure their preparedness for the cessation of the USD LIBOR panel.
The FSB’s Official Sector Steering Group (OSSG) will continue to serve as a forum in 2022 and 2023 for cooperation amongst authorities that have leading roles in interest rate benchmark reforms and transition preparedness.
Global transition roadmap for LIBOR
In October 2020, the FSB published a Global Transition Roadmap for LIBOR. The roadmap outlines steps that those with exposure to LIBOR benchmarks should take to ensure an orderly transition away from LIBOR by end-2021. The roadmap, which was updated in June 2021, sets out dates as follows:
Firms should have identified and assessed all existing LIBOR exposures and agreed on a project plan to transition in advance of end-2021.
By the effective date of the ISDA Fallbacks Protocol, the FSB strongly encourages firms to have adhered to the Protocol.
By the end of 2020, firms should be in a position to offer non-LIBOR linked loans to their customers.
By mid-2021, firms should have established formalised plans to amend legacy contracts where this can be done, and discuss steps that may be needed for use of alternative rates for LIBOR-linked exposures that extend beyond end-2021.
By end-2021, firms should be prepared for all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings, to cease, and to cease entering into new contracts that use USD LIBOR.
By June 2023, firms should be prepared for all remaining USD LIBOR settings to cease.
To support a smooth transition away from LIBOR by end-2021, the FSB has issued additional guidance on:
The use of the ISDA spread adjustments in cash products
In April 2022, the FSB issued a statement welcoming smooth transition away from LIBOR.
IOSCO Principles for Financial Benchmarks
The FSB endorses the Principles for Financial Benchmarks developed by the International Organization of Securities Commissions (IOSCO), which cover the important issues of benchmark governance, integrity, methodology, quality and accountability.
IOSCO in September 2021 reiterated the importance of continued transition to robust alternative benchmarks, i.e. Risk-Free Rates, to mitigate potential risks arising from the cessation of LIBOR, including USD LIBOR. It has cautioned that some alternative benchmarks, notably credit sensitive rates, may pose risks to financial stability to the extent that they are based on an underlying market whose relative size is small in relation to the volume of trading (Principle 6) and lack data sufficiency in the benchmark design (Principle 7). Indeed, some of these rates are based on similar markets to LIBOR and may replicate many of LIBOR’s shortcomings, as highlighted by authorities in the US and UK.
The Co-Chairs of the FSB’s OSSG, Andrew Bailey (Governor of the Bank of England) and John C. Williams (President of the Federal Reserve Bank of New York) have expressed their support for this IOSCO statement.
National Working Groups
Continued cooperation with market participants is key to achieving a smooth transition. As part of their work to develop RFRs, authorities in FSB jurisdictions have set up national working groups to make recommendations on the transition to RFRs.