Michael McKee

On 14 November 2018, the Financial Stability Board (FSB) published a progress report on the implementation of its 2014 recommendations to reform major interest rate benchmarks as well as on its more recent work to improve contractual robustness in relation to the risk of discontinuation of major interest-rate benchmarks (Progress Report). The FSB’s 2014 recommendations aimed to strengthen existing benchmarks for key Interbank Offered Rates (IBORs) in the unsecured lending markets and promote the development and adoption of alternative nearly Risk-Free Reference rates (RFRs).

Key points of the Progress Report

  • Developments in IBORs: At end-2021, official sector support will be withdrawn for the London Inter-bank Offered Rate (LIBOR). As a result, authorities warn that the publication of LIBOR may cease. Progress is being made to enhance the existing methodologies for other major IBORs, including the Euro Interbank Offered Rate (EURIBOR) and the Tokyo Interbank Offered Rate (TIBOR), with a view to making them more grounded in actual transactions and to strengthening the regulatory and supervisory framework. Other jurisdictions are also taking steps and implementing regulatory reforms to strengthen methodologies and/or develop and implement regulatory reforms.
  • Transition to alternative reference rates: Markets in currency areas currently reliant on LIBOR will need to transition to new, sufficiently robust, reference rates. In this respect, work is already underway to identify RFRs and other alternative reference rates and to ensure a smooth transition. More specifically, in the US, the Federal Reserve Board has begun to publish the Secured Overnight Financing Rate (SOFR), as the RFR for USD, and the Alternative Reference Rates Committee is planning to construct forward-looking term reference rates for USD. In the UK, the Sterling Overnight Index Average (SONIA) is to become the RFR for short term GBP, while the Working Group on Sterling Risk-Free Reference Rates is consulting on similar plans for forward-looking longer term reference rates for GBP. Additionally, a new Euro Short-Term Rate (ESTER) has been selected to replace the Euro Over Night Index Average (EONIA) and to serve as a basis for the calculation of fallback rates for contracts linked to EURIBOR. Other currency areas covered by the report typically follow a multiple rate approach, which means that existing IBORs may coexist with identified RFRs.
  • Development of fallback provisions to enhance contractual robustness: The report notes that it is important to ensure contractual fallback provisions are sufficiently robust to mitigate the risk of discontinuation of major interest-rate benchmarks. This is relevant not only for derivatives, which have the largest exposure to IBORs, but also for several cash products, such as syndicated loans, bonds and mortgages. Industry bodies, such as the Loan Market Association, have started to produce suggested provisions for inclusion in documents making it easier for parties to transition to the new RFRs once those are in place. The Progress Report discusses the work of the FSB member authorities, national working groups and the International Swaps and Derivatives Association in this respect.

The FSB Official Sector Steering Group is actively monitoring the implementation of the FSB 2014 recommendations and is enhancing its coordination efforts in the area of reforming major interest rate benchmarks. The FSB will be publishing another progress report in late 2019.