FSB Chair Outlines Progress on Reform of Interest Rate Benchmarks

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