Where next for IBORs?

The EU Benchmarks Regulation (BMR) has tossed a stone into the once calm waters of the benchmarks market. As benchmark and rate administrators look to address the more stringent compliance regime ushered in by the Regulation, the market is in flux. The future of various rates and benchmarks that have served as the cornerstones of countless financial instruments and contracts are now uncertain, and all benchmark users must keep a weather eye on developments to secure their business and remain on the right side of the regulator.

One area that is set to change dramatically is in the use of Interbank Offered Rates (IBORs). These reference rates have been critical to the financial markets as they underpin many trillions of dollars in derivatives, bonds, loans, securitizations and deposits. However, they were also at the heart of the rate rigging scandals that shocked the industry and led to the creation of BMR. In what form these rates will survive, or whether they will be replaced entirely, has been a central question in the aftermath of BMR.

Earlier this year, the market received some clarity on these questions when the International Swaps and Derivatives Association (ISDA) launched an IBOR Global Benchmark Transition Roadmap. The document outlines how dependence on IBORs is coming to an end as jurisdictions look to transition to nearly risk-free rates (alternative RFRs). The Roadmap, which was launched in partnership with the Association of Financial Markets in Europe, the International Capital Market Association, and the Securities Industry and Financial Markets Association, aims to highlight the challenges of this transition.

The publication of this documents reflects a market-wide increase in activity around creating RFRs as a replacement to IBORs. By outlining the challenges of the transition period, ISDA hopes to move on to a second phase where it will be able to document potential solutions. As part of this work, the organization intends to undertake a global survey of buy- and sell-side firms to inform an in-depth report aimed at supporting interest rate benchmark planning efforts.

Until these documents are published, some uncertainty will remain over RFRs and IBORs. This is in line with the benchmarks landscape: it is still unclear as to which existing benchmarks will remain when the period of grace for BMR expires in 2020. Faced with this uncertainty, it is more important than ever that benchmark users have in place robust data management and compliance systems.

To be fit for purpose, these systems must be able to identify changes in the benchmarks market as they occur to ensure that all benchmarks used are from administrators that are compliant with the regulation. Additionally, benchmark users need to ensure they have in place replacement benchmarks in the event a benchmark is withdrawn.

At RIMES, we believe the best approach to addressing these challenges is to subscribe to managed compliance services. Unlike in-house alternatives, managed compliance services are automatically updated to match the evolving benchmark market. This means that whatever happened to their existing benchmarks, organizations will have the information they need to be compliant with BMR while maintaining business as usual.

BMR and other regulatory topics will be discussed at RIMES’ upcoming EMEA Client Conference, which will take place in London on May 2. To register, email events@rimes.com

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