IOSCO published a statement to inform relevant stakeholders about how an early transition to risk-free rates can mitigate potential risks arising from the expected cessation of the London Inter-Bank Offered Rate (LIBOR). The statement is important for all market participants with a significant exposure to the USD LIBOR benchmark through, for example, the trading of financial instruments and other arrangements that reference this benchmark directly. It is also relevant for participants that reference another rate which, in turn, uses USD LIBOR as an input for its calculation.
Through its statement, IOSCO wishes to raise awareness about the impact of the likely cessation of LIBOR and about the need for relevant stakeholders to transition from the widely used USD LIBOR to the alternative risk-free rates—particularly to the new Secured Overnight Financing Rate (SOFR). Raising awareness is important to facilitate prudent risk management across corporate and financial institutions and to mitigate potential financial stability and conduct risks. The statement sets out a number of matters for users of the USD LIBOR benchmark to consider. These matters include risk-free rates, infrastructure, conventions, fallbacks, term rates, regulatory dependencies, and communication and international engagement. For each of these, the statement recognizes that the use of USD LIBOR varies by jurisdiction. Therefore, the statement aims to increase awareness about the need to move away from LIBOR and to allow for more detailed discussions on the transition to alternative risk-free rates, where appropriate.
Keeping in mind the information set out in this statement, market participants should consider how this transition will affect their business and what steps are needed to mitigate the related risks. The following are the key messages of the statement:
- Risk-free rates provide a robust alternative to the interbank offered rates (IBORs) and can be used in the majority of products.
- In both new and existing IBOR contracts, the inclusion of robust fallbacks should be considered a priority.
- The best risk mitigation to a LIBOR cessation event is moving to risk-free rates now.
- It is prudent risk management for market participants to engage early in the LIBOR transition process in preparation for the cessation of LIBOR post-2021.
Keywords: International, Banking, Securities, Risk-free Rates, IBOR, LIBOR, SOFR, Interest Rate Benchmarks, Benchmarks Fallbacks, IOSCO
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