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Reforming Major Interest Rate Benchmarks

On the 9th of July, the Financial Stability Board (FSB) published an interim progress report on reforms to existing major interest rate benchmarks (such as LIBOR, EURIBOR and TIBOR, collectively the “IBORs”) and in the development and introduction of alternative near risk-free interest rate benchmarks (termed “RFRs”).

Background

In July 2014 the FSB had published a report entitled Reforming Major Interest Rate Benchmarks, which proposed recommendations, developed by the Official Sector Steering Group (OSSG), for enhancing existing benchmarks for key interbank unsecured lending markets (such as the IBORs), and to promote the development and adoption of nearly risk-free benchmark rates (RFRs) where appropriate.

That 2014 report advocated that there should be a strengthening in existing IBORs and other reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transactions data. In addition it recommended steps should be taken to develop alternative RFRs, given that there are certain financial transactions, including many derivatives transactions that are better suited to reference rates that are closer to risk-free.

Progress

Last week’s interim report examines progress toward the FSB’s recommendations for reforms in this area, developed by the OSSG and published in July 2014. It notes that the administrators of the most widely used IBORs have all taken major steps such as undertaking reviews of respective benchmark methodologies and definitions, data collection exercises and feasibility studies, consideration of transitional and legal issues, and broad consultations with submitting banks, users and other stakeholders.

The interim report also notes that OSSG members have made tangible progress in identifying potential RFRs. In particular, detailed data collection exercises have been undertaken in key markets, and work is now underway to identify potential RFRs, where these do not currently exist.

Global Issue

While the FSB recommendations were directed at the three major IBORs, OSSG member authorities, benchmark administrators and market participants from other jurisdictions, including Australia, Canada, Hong Kong, Mexico, Singapore and South Africa, have also taken steps towards reforming the existing rates in their own jurisdiction, given the importance of these rates to their domestic markets and their role as international financial centres.

In addition to authorities in the euro area, Japan, UK and US, several other OSSG members are also working with industry in local markets to develop RFRs in their respective currencies. The OSSG is co-chaired by Martin Wheatley (Chief Executive Officer, UK Financial Conduct Authority) and Jerome Powell (Member, Federal Reserve Board of Governors). The steering group brings together central banks and regulatory authorities to coordinate international work to review and reform interest rate benchmarks. It will continue to monitor progress in implementing the FSB’s recommendations in the year ahead, and will prepare an updated progress report for publication by the FSB in July 2016.

Progress in Reforming Major Interest Rate Benchmarks – Interim Report is available here.

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