A number of concerns have been raised regarding the integrity and reliability of major financial market benchmarks, particularly interest rate and foreign exchange (FX) benchmarks.
Major interest rate reference rates (such as LIBOR, EURIBOR, and TIBOR or generically known as IBORs) are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts. The cases of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets, undermined confidence in the reliability and robustness of existing interbank benchmark interest rates. Uncertainty surrounding the integrity of these reference rates represents a potentially serious source of vulnerability and systemic risk. Against this background, the G20 asked the FSB to undertake a fundamental review of major interest rate benchmarks and plans for reform to ensure that those plans were consistent and coordinated, and that interest rate benchmarks are robust and appropriately used by market participants.
Interest rate benchmarks
The FSB worked with authorities and standard-setting bodies to develop reform proposals for these benchmarks. In July 2013 the FSB established an Official Sector Steering Group (OSSG), which comprises senior officials from central banks and regulatory authorities. The FSB’s work is focused on interest rate benchmarks that are considered to play the most fundamental role in the global financial system. The FSB published its recommendations on interest rate benchmarks in July 2014. The recommendations included measures to:
Strengthen IBORs in particular by anchoring them to a greater number of transactions, where possible;
Improving the processes and controls around submissions;
Identifying alternative near-risk free rates (RFRs); and,
Encouraging derivative market participants to transition new contracts to an appropriate RFR, where suitable.
Since publishing the recommendations in 2014 the FSB has published a series of progress reports to assess implementation of the recommendations by FSB jurisdictions. In June 2019 the FSB published a user’s guide for overnight RFRs.
The OSSG engages regularly with the International Swaps and Derivatives Association (ISDA) and with other stakeholders with a view to their taking action to enhance contractual robustness in derivatives products and cash products, such as loans, mortgages, and floating rate notes. Since July 2016, ISDA has undertaken work, at the request of the OSSG, to strengthen the robustness of derivatives markets to the discontinuation of widely-used interest rate benchmarks. In November 2019 the FSB called on ISDA to add a “pre-cessation” trigger alongside the cessation trigger in definitions for new derivatives and in a single protocol, without embedded optionality, for outstanding derivative contracts. In January the UK Financial Conduct Authority responded to a request from ISDA in response to the FSB letter asking for further clarity about the length of any period in which a “non-representative” LIBOR might continue to be published. ISDA launched a second consultation on this issue in February 2020.
National Working Groups
As part of their efforts to develop RFRs authorities in FSB jurisdictions have set up national working groups to make recommendations on the transition to RFRs. The indication from the UK authorities that they will neither persuade nor compel panel banks to participate in LIBOR panels after end-2021, has highlighted the importance of ensuring smooth transitions to avoid risks to financial stability.