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

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494