On Monday, the Financial Stability Board (FSB) published the review of major interest rate benchmarks and the plans for reform.
The review was carried out by the Official Sector Steering Group (OSSG) of regulators and central banks, drawing on two main work streams.
- A review of the standards and principles for sound benchmarks, including an assessment of the major interest rate benchmarks against the internationally agreed and endorsed IOSCO Principles for Financial Benchmarks.
- A report by private sector experts asked to identify additional benchmark rates and to analyse the transition issues arising in the event of a move to an alternative rate.
The major interest reference rates such as the London Interbank Offered Rate, Euro Interbank Offered Rate and the Tokyo Interbank Offered Rate (LIBOR, EURIBOR, and TIBOR, collectively the IBORs), are widely used in the global financial system as benchmarks for a large volume and a broad range of financial products and contracts. The cases of market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets, have lowered confidence in the reliability and robustness of existing benchmark interest rates.
Uncertainty surrounding the integrity of these reference rates represents a serious source of economic vulnerability and systemic risk. It was against this background that in February 2013, the G20 asked the FSB to undertake a fundamental review of major interest rate benchmarks and plans for reform to ensure that those plans are consistent and coordinated, and that interest rate benchmarks are robust and appropriately used by market participants. The review found that further progress is needed in ensuring that the IOSCO Principles on benchmark design, data sufficiency and transparency of benchmark determinations are implemented.
In order to tackle transition issues arising from a move to an alternative rate, the OSSG recommends a multiple-rate approach that involves:
- Bolstering the existing IBORs and other potential reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transactions data. The report refers to these enhanced rates as IBOR+; and
- Developing alternative, nearly interest-risk free reference rates (RFRs).
The FSB has endorsed these recommendations and mandated the OSSG to monitor and oversee the implementation of the reforms. The report concludes that the IBORs and other financial benchmarks should be based on actual trades, rather than estimates. Benchmarks “should minimise the opportunities for market manipulation”, according to the FSB. They “should be anchored in observable transactions wherever feasible”.
The report sets out timelines for implementing the OSSG’s recommendations. In particular, IBOR administrators are expected to have consulted on any recommended changes relating to IBOR+ by the end of 2015 and central banks and supervisory authorities should work to implement at least one IOSCO-compliant RFR by 2016. The OSSG is expected to produce an interim progress report in 12 months’ time, with the final monitoring report due in 24 months’ time.
View the report here: Reforming major interest rate benchmarks