GovernanceInterest RatesFSB: Continued reliance on LIBOR poses risks to financial stability

FSB: Continued reliance on LIBOR poses risks to financial stability

FSB report sets out need to reduce risks to financial stability as banks need to move now on to transition away from LIBOR by end-2021.

The Financial Stability Board (FSB) says reliance of global financial markets on LIBOR poses risks to financial stability and has called for significant and sustained efforts by the official sector and by financial and non-financial firms across many jurisdictions to transition away from LIBOR by end-2021.

In its annual progress report published on 18 December, FSB discussed the implementation of recommendations to reform major interest rate benchmarks.

Progress on the transition

The report sets out progress on implementing the FSB recommendations and finds that:

  • There is a common view across FSB jurisdictions that the use of overnight risk-free rates should be encouraged across global interest rates markets where appropriate, and that contracts referencing IBORs should have robust fallbacks.
  • There has been good progress in many derivatives and securities markets, but transition in lending markets has been slower, and needs to accelerate.
  • Firms undertaking their transition away from LIBOR should not delay their programmes until the emergence of possible forward-looking term versions of risk-free rates.
  • The parallel efforts on transition across multiple jurisdictions and currencies are an opportunity to align conventions and other practices across currencies and products.
  • Transition requires significant commitment from the official sector, working alongside market participants.
  • Given the degree of risk arising from the continued reliance on LIBOR, regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches

Andrew Bailey and John Williams, co-chairs of the FSB Official Sector Steering Group, said: “FSB members are committed to transitioning to more robust financial benchmarks. It is essential that both firms and national authorities around the world take steps now to ensure a smooth transition. As a matter of priority, authorities should discuss with financial institutions, and financial institutions with their clients, the transition process and agree on the steps needed.”

2020 work programme

The FSB announced on 17 December, as part of its 2020 work programme, that it will conduct a survey of exposures to LIBOR and supervisory measures being taken to address benchmark transition issues, in order to improve collective understanding of LIBOR transition progress so far and to increase awareness of the importance of ensuring timely transition.

The FSB will deliver to G20 Finance Ministers and Central Bank Governors in July 2020, and publish, a report on remaining challenges to benchmark transition.

In the UK, firms have already got an alternative rate to turn to in the form of the Sterling Overnight Index Average (SONIA), which is now being administered and published by the Bank of England. SONIA is calculated as a trimmed mean of rates paid on overnight unsecured wholesale funds, and regulators say it’s more robust because, unlike LIBOR, it’s anchored in liquid underlying markets. Part of the reason so many treasurers have been able to transition to SONIA with relative ease is because many of the market’s leading TMS solutions like Salmon Treasurer are already being recalibrated in order to facilitate transitions from LIBOR to the new benchmark. Where unsupported, businesses that have yet to transition to a new RFR would do well to consider treasury management solutions that are designed to facilitate the move, or explore new modules that can be integrated within existing systems.

“I think there are two main concerns to worry about,” says Peter Seward, GTreasury Vice President, Market Development, Risk on regulatory challenges for treasurers with regards to this transition. “Firstly, it’s a big change and it’s quite slow moving. It still has two years to run, which inevitably means a lot of things are going to change. Then, secondly, certainly in the longer term, the effects are going to be far-reaching.”

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