FSB published a progress report on the implementation of reforms to major interest rate benchmarks, including the London Inter-bank Offered Rate (LIBOR) benchmark. The appendices to the report include a table that maps major interest rate benchmarks to alternative reference rates and a roadmap that sets out the timetable of actions for financial and non-financial sector firms to take to ensure a smooth LIBOR transition by the end of 2021. The report presents progress with respect to LIBOR, EURIBOR, and TIBOR currency areas. Other covered currency area jurisdictions include Australia, Brazil, Canada, Hong Kong, Indonesia, Mexico, Saudi Arabia, Singapore, South Africa, and Turkey.
The report notes that much more needs to be done by both the private and public sector over the next year to increase awareness of, and preparedness for, LIBOR transition, and ensure proactive transition in all cases, by adhering to the best practices and standards appropriate for individual products. To support and facilitate transition, FSB has developed a global transition roadmap setting out high-level steps to be taken ahead of the end of 2021. While recognizing that the transition timelines in different jurisdictions respond to the needs and specific institutional and legal conditions, this roadmap is intended to inform firms of some of the steps they should be taking now and over the remaining period to the end of 2021 to successfully mitigate risks to global financial stability. These are considered prudent steps to take to ensure an orderly transition by end-2021 and are intended to supplement the existing timelines or milestones from industry working groups and regulators. The roadmap outlines the progress firms should have made till now and specifies that by mid-2021:
- On the basis of a full assessment of their stock of legacy contracts, firms should have determined which contracts can be amended in advance of the end of 2021 and establish formalized plans to do so in cases where counterparties agree.
- Where LIBOR-linked exposure extends beyond the end of 2021, firms should make contact with the other parties to discuss how existing contracts may be affected and what steps firms may need to take to prepare for use of alternative rates.
- Firms should have implemented the necessary system and process changes to enable transition to robust alternative rates.
- Firms should aim to use robust alternative reference rates to LIBOR in new contracts wherever possible.
- Firms should take steps to execute formalized plans, where realistic, to convert legacy LIBOR-linked contracts to alternative reference rates in advance of the end of 2021.
Consistent with the above and emphasizing the importance of action on this timetable ICE Benchmark Administration (IBA), which is the administrator of LIBOR, announced on November 18, 2020 that it will consult on its intention that the euro, sterling, Swiss franc, and yen LIBOR panels would cease at the end of 2021. Announcements in relation to the USD LIBOR are expected to follow. In its role as regulator of IBA, the UK FCA has also set out its potential approach for use of new powers under proposed UK legislation to ensure an orderly wind-down of LIBOR and published consultations on its proposed policies for using them. FSB Official Sector Steering Group (OSSG) Co-Chairs Andrew Bailey and John C. Williams said that “The message that all market participants should take from this report and this week’s announcements from the IBA and FCA is that we need to be prepared for the end of LIBOR. Everyone needs to be ready."
Keywords: International, Banking, Securities, Interest Rate Benchmarks, Legacy Contracts, Risk Free Rates, IBA, LIBOR, Benchmark Reforms, Derivatives, FSB
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