Featured Product

    IOSCO on Compliance of Credit-Sensitive Rate with Benchmark Principles

    September 08, 2021

    The International Organization of Securities Commissions (IOSCO) published a statement reiterating the importance of continued transition to robust alternative financial benchmarks—that is, risk-free rates—to mitigate potential risks arising from the cessation of LIBOR, including the USD LIBOR. The IOSCO also notes that the alternative financial benchmarks will need to be compliant with the IOSCO Principles on Financial Benchmarks. It also notes that credit-sensitive rates that are interest rate benchmarks that measure the credit risk component of unsecured borrowing in certain markets have started to emerge as a possible alternative to the USD LIBOR. IOSCO highlights that alternative financial benchmarks need to be compliant with the IOSCO Principles on Financial Benchmarks. With respect to the credit-sensitive rates, IOSCO calls for greater attention to Principles 6 and 7.

    Principle 6 asks administrators to consider the “relative size of the underlying market in relation to the volume of trading.” Principle 7 emphasizes “data sufficiency in a benchmark’s design to accurately and reliably represent the underlying market” measured by the benchmark. Therefore, in line with the Principles 6 and 7, IOSCO calls on administrators to assess whether the systemic benchmarks that are used extensively are based on active markets with high volumes of transactions, representing the underlying interest they intend to measure and whether such benchmarks are resilient during times of stress. Regulators are concerned that some shortcomings of LIBOR may be replicated through the use of credit-sensitive rates that lack sufficient underlying transaction volumes.

    In its statement, IOSDCO notes that the disproportionality between the low/modest volume of transactions underlying credit-sensitive rates and the increasingly higher volumes of activity in markets referencing them (inverted pyramid problem) raises concerns about market integrity, conduct risks, and financial stability risks. The decline in the underlying activity of some of the credit-sensitive rates during stress periods, such as the COVID-19 pandemic, raises additional regulatory concerns. Therefore, benchmark administrators of credit-sensitive rates should consider how their benchmarks would continue to meet Principles 6 and 7 over time, in case use of a benchmark becomes widespread. Some of these rates are based on markets similar to LIBOR and may replicate many shortcomings of LIBOR, as highlighted by the authorities in the US and the UK. Users of benchmarks should also consider the robustness and reliability of the benchmarks they choose and ensure that they have reliable fallback mechanisms that can be used, in case their chosen benchmarks cease or become unrepresentative.

    IOSCO supports the recent remarks of the Financial Stability Board (FSB) that "to ensure financial stability, benchmarks which are used extensively must be especially robust." Widespread use of, and transition to, credit-sensitive rates, instead of the U.S. Alternative Reference Rates Committee’s preferred Secured Overnight Financing Rate (SOFR), may therefore pose risks to financial stability. The IOSCO Board notes that SOFR provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives. Users of benchmarks place considerable value on a benchmark being IOSCO compliant. To continue to give market confidence in the reliability and integrity of financial benchmarks, IOSCO will closely monitor how the IOSCO badge is used in compliance assessments of the relevant credit-sensitive rates.

     

    Related Links

    Keywords: International, Banking, Securities, Interest Rate Benchmark, Credit Sensitive Rate, Benchmark Reforms, Risk Free Rate, LIBOR, USD LIBOR, SOFR, Derivatives, IOSCO

    Related Articles
    News

    BIS Paper Studies Impact of Fintech Lending on Small Businesses in US

    The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.

    September 26, 2022 WebPage Regulatory News
    News

    UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks

    The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).

    September 26, 2022 WebPage Regulatory News
    News

    EBA Launches EU-Wide Transparency Exercise in 2022

    The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.

    September 23, 2022 WebPage Regulatory News
    News

    SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks

    The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."

    September 22, 2022 WebPage Regulatory News
    News

    EC Rule Lists Advanced Economies for Market Risk Capital Calculations

    The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.

    September 21, 2022 WebPage Regulatory News
    News

    EBA Publishes Final Regulatory Standards on STS Securitizations

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.

    September 20, 2022 WebPage Regulatory News
    News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News
    News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News
    News

    MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures

    The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.

    September 15, 2022 WebPage Regulatory News
    News

    BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

    The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.

    September 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8521