FSB published a progress report to the G20 on the transition away from London Inter-bank Offered Rate (LIBOR). The report discusses recent developments, supervisory issues, and sets out the next steps. Given the limited time available until the end of 2021, FSB strongly urges market participants to act now to complete the steps set out in its global transition roadmap; global and national financial regulators should maintain the momentum of transition and continue to monitor the progress closely. The progress report to the G20 sets the scene on issues and risks associated with LIBOR transition and presents observations and key themes from the FSB Official Sector Steering Group (OSSG) on the remaining aspects of benchmark transition.
The report also presents findings from FSB’s follow-up questionnaire on supervisory issues related to LIBOR transition. Since some of the most widely used USD LIBOR settings will only cease after the end of June 2023, the focus of the next steps set out by FSB on further monitoring will be the remaining issues associated with LIBOR transition after the end of 2021. This will include monitoring new issuance of USD LIBOR contracts post 2021 as well as the size and resolution of tough legacy contracts referencing USD LIBOR that are due to mature after June 2023. FSB will review these issues in mid-2022 and assess the implications for supervisory and regulatory cooperation. Overall, the progress report sets out the following key messages:
- With cessation timelines now confirmed, there should be no remaining doubts as to the urgency of the need to transition away from LIBOR by the end of 2021. It is emphasized that the continuation of some key USD LIBOR tenors through to June 30, 2023 is intended only to allow legacy contracts to mature, as opposed to supporting new USD LIBOR activity.
- Supervisory authorities should step up their efforts for active and adequate communication to increase awareness of the scope and urgency of relevant Interbank offered rate (IBOR) transitions for all clients and other market participants. Financial institutions and non-financial institutions need to accelerate adoption of risk free rates in new contracts, acceptance of newly developed products, as well as active conversion of legacy LIBOR-referencing contracts to directly reference risk free rates and/or insertion of robust fallback language. Emerging markets and developing economies lagging engagement with financial institutions should step up efforts to increase their outreach to promote awareness and actions.
- Market participants must not wait for development of additional tools to transition away from LIBOR and need to be transitioning to reference rates that are compatible with financial stability and do not reintroduce the vulnerabilities seen with LIBOR to support sustained financial stability. Given the many examples of successful use of overnight risk-free rates across a wide range of cash products, in many cases, a risk-free rate derived term rate will not be needed for new cash products. FSB has encouraged market participants to seek to use overnight risk-free rates directly in these products.
- On the international front, collaboration and coordination remain crucial in expediting the transition progress. FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR regardless of where those trades are booked or in which currency they are denominated. As set out in the FSB statement on smooth and timely transition away from LIBOR, FSB members will be reiterating the expectation that regulated firms within their remit cease new use of LIBOR as soon as practicable, with reference to relevant milestones in each currency, and no later than the end of 2021.
- With only a few months remaining until the end of 2021, jurisdictions should ensure the ”identification” recommendations from FSB’s July 2020 report are now complete and that work is well underway in adopting the recommendation listed under “facilitation” and “coordination.” The follow-up questionnaire findings show that recommendations grouped under the area of ”identification”, which are foundational actions necessary to lay the ground for further work on ”facilitation” and ”coordination” have seen the greatest level of completion across all jurisdictions, with work on ”facilitation” and “coordination” lagging behind. Also, the progress of reviews of existing fallback language in legacy contracts varies significantly across jurisdictions. In the absence of protocol mechanisms similar to the ISDA Fallback Protocol, there continues to be less progress in transitioning legacy cash products. As indicated in a June 2021 statement, FSB supports the potential benefits of using the ISDA spread adjustments for cash products that are to fall back or move from an IBOR to overnight risk-free rates, or to risk-free-rate-based term rates.
Keywords: International, Banking, Securities, LIBOR, Risk Free Rates, Global Transition Roadmap, Legacy Contracts, Fallback Protocol, Benchmark Reforms, ISDA, FSB
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