FSB Chair Outlines Progress on Reform of Interest Rate Benchmarks
Randal K. Quarles, the Chair of FSB and the Vice Chair for Supervision of FED, spoke about reforming major interest rate benchmarks, at the FSB roundtable in Washington DC. He highlighted that FSB has coordinated the international effort to reform interest rate benchmarks at the direction of G-20. This is an important effort across the globe, but nowhere is it of more importance than in the jurisdictions relying on LIBOR.
Mr. Quarles noted that LIBOR was a very poorly structured rate; contributing banks were asked to submit quotes without any requirement of evidence of transactions or other facts to back them up, which made them susceptible to manipulation. With subsequent reforms, contributors provide this type of evidence where possible, but LIBOR is based on an underlying market with so few transactions that there is relatively little direct evidence they can provide. Many submitting banks are uncomfortable with this situation and some sought to stop their participation. Therefore, the official sector has had to step in to support LIBOR by securing a voluntary agreement with the remaining banks to continue submitting through 2021. Meanwhile, the official sector has convened national working groups to help develop alternative risk-free rates and navigate a very complicated transition.
He added that banks should conduct at least as much due diligence on the reference rates that they use as they conduct on the creditworthiness of their borrowers. The national working groups convened by many of the FSB member authorities have performed that type of diligence with the Secured Overnight Financing Rate, or SOFR, and the risk-free rates identified in other jurisdictions. These alternative risk-free rates have been created or substantially reformed to ensure that robust, transaction-based rates that accurately represent well-defined underlying markets and are consistent with internationally-recognized standards are available.
He highlighted that this month marks the one-year anniversary of SOFR and is close to the one-year anniversary of the other new risk-free rates. Over the year, new futures markets, cleared swap markets, and debt markets have been established based on these new rates. He highlighted that there are almost two and a half years until the point at which LIBOR could end and this transition needs to continue to accelerate. The private sector needs to take on this responsibility. The supervisory teams of FED are including the transition away from LIBOR in their monitoring discussions with large firms. FED will expect to see an appropriate level of preparedness at the banks it supervises. As the Alternative Reference Rates Committee (ARRC) continues to make progress on industry-led approaches to the transition, the transition paths away from LIBOR will become clearer for banks of all sizes. FSB has supported this transition globally while FSOC has supported the work of ARRC in the U.S.
Related Link: Speech (PDF)
Keywords: International, Banking, Securities, Interest Rate Benchmarks, LIBOR, SOFR, Risk-Free Rates, FED, FSB
Previous Article
FASB Tentative Decisions on Targeted Transition Relief on Topic 326Related Articles
HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
BoE Sets Out Plan to Transform Data Collection from Financial Sector
BoE has set out a three-phased plan to transform data collection from the UK financial sector over the next decade.
BIS Issues Updates on Technology Initiatives on Cross-Border Payments
BIS recently made a couple of announcements with respect to the planned and ongoing work in the area of financial technology.
ESRB Updates List of Macro-Prudential Measures in February 2021
ESRB updated the list of national macro-prudential measures applied by each member state in the European Economic Area.
BoE Survey Shows Positive COVID Impact on Outsourced Banking Services
BoE has set out results of a survey on the impact of COVID-19 events on the use of machine learning and data science.
ECB Issues Opinion on Proposal to Regulate Crypto-Asset Markets in EU
In response to a request from the European Council and Parliament, ECB published an opinion on the proposed regulation on markets in crypto-assets.
APRA Announces Aggregate Committed Liquidity Facility for Banks
APRA announced the updated aggregate amounts for the 2021 Committed Liquidity Facility (CLF) established between the Reserve Bank of Australia (RBA) and certain locally incorporated authorized deposit-taking institutions that are subject to the Liquidity Coverage Ratio (LCR).
ECB and UK Authorities Agree on Post-Brexit Supervisory Cooperation
ECB published supervisory Memorandums of Understanding (MoUs) with UK as well as other European and non-European authorities.
EIOPA Outlines Strategic Supervisory Priorities for Insurance Sector
EIOPA identified business model sustainability and adequate product design as the two EU-wide strategic supervisory priorities.
US Agencies to Revise FFIEC 031, FFIEC 041, and FFIEC 051 Reports
After considering comments received on the November 2020 proposal, US Agencies (FDIC, FED and OCC) are proceeding with the proposed revisions to the reporting forms and instructions for Call Reports FFIEC 031, FFIEC 041, and FFIEC 051.