June 04, 2019

FSB published a user guide for overnight risk-free rates. The guide provides an overview of the risk-free rates, details how these rates are calculated, and presents options on how the overnight risk-free rates can be used in cash products. The guide is intended to encourage adoption of these rates where they are appropriate.

The document is based on a recent paper published by the Alternative Reference Rates Committee (ARRC) and the recent work of the National Working Group on Swiss Franc Reference Rates (CHF NWG). It intends to broaden the usage of risk-free rates to other currency areas. Risk-free rates are overnight rates that can be used as alternative benchmarks for the existing key interbank offered rates (IBORs) in the unsecured lending markets. FSB has welcomed the progress, by public authorities and private-sector working groups, in identifying and developing risk-free rates in many currency areas. Risk-free rates have been identified because these rates are robust and 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.

National working groups in several currency areas are also pursuing the development of forward-looking term rates derived from risk-free rate derivative markets. FSB recognizes that there may be a role for such rates for certain cash products. Nevertheless, FSB has stated that it considers that the greater robustness of overnight risk-free rates makes them a more suitable alternative than a forward-looking term risk-free rates in the bulk of cases where an IBOR is currently used. This guide focuses on risk-free rates and not on forward-looking term rates. In derivatives markets, where there is a long history of use of overnight rates, many market participants are already quite familiar with the various structures of using such rates. Although there are many examples of the use of overnight rates in cash products, fewer participants in these markets are familiar with them. FSB encourages the development and adoption of such overnight risk-free rates where appropriate—for example, in business where term properties are not needed or where exposure to bank credit risk is not necessary or desirable—to enhance financial stability.

 

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Keywords: International, Banking, Securities, Risk-free Rates, IBOR, Financial Stability, Interest Rate Benchmark, FSB

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