ISDA published its quarterly update in August 2019. This update highlights that progress has been made on benchmark reform and the focus is now on building liquidity and trading activity in the new risk-free rates. It also highlights that the work can move forward on finalizing and implementing the new fallbacks into derivatives contracts and reducing the systemic threat of a permanent discontinuation of LIBOR and other interbank offered rates (IBORs). Market feedback has now been sought on nine key IBORs in total, including US dollar LIBOR.
As with the first consultation last year, the latest consultation asked market participants to opine on possible methodologies to adjust for structural differences between the IBORs and the risk-free rates that will replace them if a fallback is triggered. Following a request for proposal earlier this year, ISDA has now chosen an independent service provider to calculate and publish the adjustments. Ultimately, the ISDA definitions are expected to be amended before the end of the year to implement fallbacks for the nine IBORs that have beeen subject to consultation so far. An ISDA protocol will also be developed to enable firms to adapt legacy derivatives contracts.
Going forward, a consultation on adjustments to the fallback for euro LIBOR and EURIBOR will be held after the alternative risk-free rate for euro (€STR) is published in October. There also remains an enormous amount of work to shift the market away from its use of LIBOR and other IBORs and to develop trading activity and liquidity in the alternative risk-free rates before the end of 2021. Given that the adjusted fallback will not match the relevant IBOR exactly, voluntary adoption of risk-free rates before any permanent cessation of an IBOR will be the preferable route for many. Nonetheless, the progress made on fallbacks is critical. This is a big step toward ensuring that derivatives markets are safer and more efficient by ensuring that a robust backup is in place if an IBOR permanently ceases to exist.
Keywords: International, Banking, Securities, IBORs, LIBOR, EURIBOR, Interest Rate Benchmarks, Risk-Free Rates, €STR, Fallback, ISDA
Previous ArticleFCA Reviews Implementation of SM&CR in Banking Sector
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.