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    ISDA Launches Indicator to Monitor Risk-Free Rate Adoption

    July 28, 2020

    ISDA launched a new indicator to monitor the adoption of alternative risk-free rates in derivatives trading. ISDA published the first monthly report of this indicator, which has been developed in conjunction with Clarus Financial Technology and will provide a snapshot of the risk-free rates trading activity in the interest rate derivatives markets. The snapshot will be based on global cleared over-the-counter (OTC) and exchange-traded derivatives data from seven central counterparties spanning six currencies (AUD, CHF, EUR, GBP, JPY, and USD). ISDA also published a whitepaper that details the methodology behind the indicator (and sub-indicators) to monitor the extend of risk-free rate derivatives trading activity.

    The indicator is intended to help derivatives market participants keep tabs on progress to shift to risk-free rates ahead of the end of 2021, when FCA will no longer compel or persuade banks to make LIBOR submissions. The risk-free rates adoption indicator tracks the percentage of cleared interest rate derivatives trading activity that references risk-free rates, measured by DV01. DV01 is a gauge of risk that represents the valuation change in a derivative contract resulting from a parallel basis point shift in the swaps curve. ISDA and Clarus also developed a number of sub-indicators that provide additional granularity based on currencies, tenor, over-the-counter versus exchange-traded interest rate derivatives, and notional amount traded. The indicator uses notional volume data in USD equivalent as the input data. Notional traded as reported by central counterparties is used for OTC interest rate derivatives markets. The number of contracts traded is converted into notional equivalents for exchange-traded derivatives markets. Contracts referencing historically dominant rates are grouped together as other indices. These cover the major interbank offered rates (IBORs) in the six currencies as well as EONIA and the effective federal funds rate. The risk-free rates covered are USD SOFR, EUR €STR, GBP SONIA, JPY TONA, AUD AONIA, CHF SARON. Only transactions cleared via a central counterparty are captured. The indicator is designed to be flexible in case other central counterparties or futures contracts gain significant volumes.


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    Keywords: International, Banking, Securities, Risk-Free Rates, IBOR, Derivatives, Interest Rate Benchmarks, Benchmark Reforms, Risk-Free Rate Adoption, ISDA

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