FSB issues IBOR reform statement
13 July 2018 Basel
Image: Shutterstock
The Financial Stability Board (FSB) has issued a statement on reforms to interbank offer rates (IBORs) and the development of overnight risk-free, or nearly risk-free, rates (RFRs) and term rates.
The FSB said the paper is intended to provide market participants and other stakeholders with the FSB’s views ahead of a forthcoming consultation by the International Swaps and Derivatives Association (ISDA) concerning fallback interest rate options for certain derivative contracts which are based on overnight RFRs.
The FSB said it started its work on reforms to IBORs in the wake of enforcement action taken by FSB member authorities following widely reported manipulation of these benchmarks. In 2014, it set out recommendations to reform major interest rate benchmarks and has been monitoring progress on implementation since then.
Benchmarks, which are used extensively, must be especially robust, said the FSB, welcoming progress made by public authorities and private sector working groups on the identification and development of overnight RFRs that meet this standard. Robustness comes from being anchored in active, liquid underlying markets, meaning they are less susceptible to manipulation.
The FSB added that in markets that face the disappearance of IBORs, notably markets reliant on London interbank offer rate (LIBOR), there needs to be a transition to new reference rates and that it will be important to have a full discussion and establish further clarity on how this transition should take place.
The FSB added that transition will only reduce vulnerabilities if it addresses the core weakness of the IBORs—the lack of deep and liquid underlying markets. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, alongside efforts to identify and facilitate the wider use of RFRs.
An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB said that it recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.
The FSB said the paper is intended to provide market participants and other stakeholders with the FSB’s views ahead of a forthcoming consultation by the International Swaps and Derivatives Association (ISDA) concerning fallback interest rate options for certain derivative contracts which are based on overnight RFRs.
The FSB said it started its work on reforms to IBORs in the wake of enforcement action taken by FSB member authorities following widely reported manipulation of these benchmarks. In 2014, it set out recommendations to reform major interest rate benchmarks and has been monitoring progress on implementation since then.
Benchmarks, which are used extensively, must be especially robust, said the FSB, welcoming progress made by public authorities and private sector working groups on the identification and development of overnight RFRs that meet this standard. Robustness comes from being anchored in active, liquid underlying markets, meaning they are less susceptible to manipulation.
The FSB added that in markets that face the disappearance of IBORs, notably markets reliant on London interbank offer rate (LIBOR), there needs to be a transition to new reference rates and that it will be important to have a full discussion and establish further clarity on how this transition should take place.
The FSB added that transition will only reduce vulnerabilities if it addresses the core weakness of the IBORs—the lack of deep and liquid underlying markets. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, alongside efforts to identify and facilitate the wider use of RFRs.
An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB said that it recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.
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