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

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8699