Interbank offered rates (IBORs) play a central role in financial markets, and act as reference rates to hundreds of trillions of dollars in notional amount of derivatives and trillions of dollars in bonds, loans, securitizations and deposits. The dependence on IBORs by all sectors of the financial markets is changing, however.
There are now real concerns about the sustainability of certain IBORs due to a significant decline in activity in the unsecured bank funding market that they are supposed to represent. Given the limited number of actual transactions, and with banks reluctant to provide submissions based on judgement, the viability of certain IBORs is now in doubt.
Significant work has been conducted by global regulators and the public-/private-sector risk-free rate (RFR) working groups to identify alternative, nearly risk-free rates and plan for a transition to those rates as appropriate.
This global effort reflects recognition that any transition to alternative RFRs is a larger undertaking than any single private or public institution is capable of delivering, and requires coordinated efforts in order to succeed.
This does not mean that individual institutions can afford to hold off taking action. In a speech on July 27, 2017, Andrew Bailey, Chief Executive Officer of the UK’s Financial Conduct Authority (FCA), stressed that each individual firm should take responsibility upon themselves.
The time for market participants to act is now. Each firm needs to understand the scale of its exposure to IBORs and formulate strategies to reduce it. This includes allowing existing IBOR exposures to roll off rather than allowing them to be renewed. These strategies will require market participants to create new products designed to reference alternative RFRs. Each institution needs to play its part in demanding, designing, supplying and trading these products.
To help market participants understand and engage with the effort led by the global regulators and RFR working groups, the Trade Associations joined together, starting in 2017, to produce the IBOR Global Benchmark Transition Roadmap (the roadmap), the Global IBOR Market Survey (the survey) and the IBOR Global Benchmark Transition Report (the report).
The roadmap was published in February 2018, and aimed to complement the work conducted by regulators and RFR working groups by focusing on three key objectives.
- It provided an overview of the background and drivers behind the benchmark reform initiatives that have been led by the Financial Stability Board (FSB) and its Official Sector Steering Group (OSSG).
- It aggregated and summarized existing information that had been published by regulators and various RFR working groups in their efforts to identify alternative RFRs and develop plans for transitioning to them.
- It aimed to raise market awareness of some of the key transition challenges identified by the RFR working groups and their efforts to address them.
The survey was intended to gauge the current state of market readiness and identify challenges and potential solutions for an orderly, efficient and coordinated transition. The survey was conducted by Ernst & Young LLP (EY) and involved in-person interviews and electronic surveys with over 150 market participants in 24 countries.
Participants were selected from buy- and sell-side institutions in the cash and derivatives wholesale and retail markets. They included investment, commercial and retail banks, hedge funds, asset managers, government-sponsored entities (GSEs), pension funds, insurance companies and other types of financial entities, corporates and other end users, infrastructure providers and law firms. A list of participants in the survey is contained in the opening pages of this report.
This report is largely based on information obtained from the survey, but also includes other publicly available information that may be helpful to market participants as they develop strategies for addressing their exposure to IBORs.
Click on the PDF link below to read the full report.