The Financial Stability Board (FSB), the international body tasked with coordinating the work of national financial authorities, has praised the progress made in reforming major interest rate benchmarks including the development of alternative risk-free rate benchmarks.
The FSB,chaired by Bank of England governor Mark Carney, published on Thursday its interim progress report on reforming major interest rate benchmarks and the implementation of the FSB recommendations issued in July 2014.
The report said that in the past year administrators for the most widely used Inter-Bank Offered Rates (Libor, Euribor, Tibor) had all taken major steps to strengthen the benchmarks including reviews of methodologies, data collection exercises and feasibility studies.
FSB also noted that although its recommendations were focused on the major benchmarks many other jurisdictions including Australia, Canada, Hong Kong, Mexico, Singapore and South Africa had all taken steps to steps reforming rates in their own jurisdictions.
In terms of the development of alternative risk free rate benchmarks, the report said national regulators had made “concrete progress in identifying potential” benchmarks that could prove suitable risk-free reference rates.
However, the regulator said national authorities needed to consider the merits of developing risk free rate across the major currencies to facilitate cross-currency transactions including FX swaps.
In its original report the FSB recommended the industry adopt a “multi-rate approach,” involving the strengthening of existing benchmarks and the development of alternative risk free reference rates.
Risk free reference rates unlike their IBOR counterparts, which include bank credit risk, are based on secured credit markets or unsecured borrowing by sovereigns with little chance of default making them effectively credit risk free.
Regulators said these benchmarks would be more appropriate for pricing many derivatives transactions, particularly as demand and reliance on secured funding grows.
European authorities the EU Commission, Council and Parliament are currently finalising the EU’s financial benchmark rules after a key European parliament vote in May cleared way for discussions to start.
The rules were originally proposed by the Commission in September 2013 but since then alternative rules have been drawn up by the other main EU institutions, the Parliament and Council.
The reforms in benchmark regulation will be discussed at length at FOW’s regulation event being held at the Grange City Hotel on September 8. To find out more about the event or to register, please visit FOW Events.