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October 10, 2017

FSB published a progress report on implementation of its 2014 recommendations to reform major interest rate benchmarks such as key interbank offered rates (IBORs). The 2014 report recommended measures for strengthening benchmarks and other potential reference rates based on interbank markets and developing alternative nearly risk-free benchmark rates. The progress report concludes that IBOR administrators have continued to take important steps to implement the FSB recommendations, including steps to adjust methodologies used to calculate benchmark rates.

The 2014 recommendations were made following examples of attempted market manipulation and false reporting of global reference rates, along with the post-crisis decline in liquidity in interbank unsecured funding markets. Regulators have taken a number of steps to address the issues, including developing powers to require mandatory contributions to benchmarks; however, it remains challenging to ensure the integrity and robustness of benchmarks and it is uncertain whether submitting banks will continue to make submissions over the medium to long-term. Regulators in some FSB jurisdictions have made good progress in supporting workstreams focused on identifying new or existing risk-free reference rates (RFRs) that could be used instead of IBORs in a range of contracts, in particular derivatives. However, limited progress has been made to date on migration from major IBORs to RFRs, even where they are already available. 

The official sector has also actively engaged with the International Swaps and Derivatives Association (ISDA) to tackle the risks associated with permanent discontinuation of widely used IBORs. ISDA has established a series of working groups and is drafting fallback arrangements for new derivatives contracts and a future protocol to amend existing contracts. The official sector places great importance on all industry stakeholders, on both the buy and sell side, entering into such protocols. It is also important that work on contract robustness is extended to other non-derivative markets where contracts reference IBORs such as mortgages, loans, floating rate notes, and futures contracts. In addition to this report, FSB had already published progress reports in 2015 and 2016. FSB will publish another progress report in 2018.

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Keywords: International, Banking, Progress Report, IBOR, Interest Rate Benchmark, RFR, FSB

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