July 12, 2018

FSB published a statement on reforms to interbank offered rates (IBORs) and the development of overnight risk-free, or nearly risk-free, rates (RFRs) and term rates. The statement is intended to inform market participants and other stakeholders about the views of FSB, ahead of a forthcoming consultation by ISDA. The ISDA consultation contemplates fall backs for certain derivative contracts based on overnight RFRs.

FSB welcomes the progress that has been made by public authorities and private-sector working groups on the identification and development of overnight RFRs that are sufficiently robust for such extensive use. These overnight RFRs are robust because they are anchored in active, liquid underlying markets. This contrasts with the scarcity of underlying transactions in the term interbank and wholesale unsecured funding markets, from which some IBORs are constructed, a characteristic which could make them susceptible to manipulation. The FSB continues to encourage the development and adoption of these overnight RFRs, where appropriate—for example, in business where term properties are not needed or where exposure to bank credit risk is not necessary or desirable. This will enhance financial stability.

In the markets that face the disappearance of IBORs, notably markets reliant on LIBOR, there needs to be a transition to the new reference rates. In these markets, it will be important to have a full discussion and establish further clarity among affected end users on how this transition should take place. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs. An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. FSB recognizes that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets. FSB published its progress report on implementation of reforms to the interest rate benchmarks in October 2017. It will publish a second progress report in November 2018.

 

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Keywords: International, Banking, Interest Rate Benchmarks, IBORs, RFR, FSB

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