Laura WilesFSB has published its thoughts on the final stage of the LIBOR transition, and the importance of markets remaining anchored in robust benchmarks in the post-transition landscape.
Choice of reference rates
FSB encouraged firms to consider their choice of reference rates so that they are using robust, suitable, sustainable benchmarks that are compatible with guidance and regulation.
It recognised the role for risk-free rate (RFR) derived term rates, and has set out the circumstances where it feels these rates would be compatible with financial stability. However, it warned that over-reliance beyond these limited circumstances carries the risk of undermining robustness due to the potential for illiquidity in underlying markets. FSB highlighted that use of RFR-based rates must be in line with official sector and national working group best practice recommendations.
FSB also warned against attempts to recreate rates based on LIBOR’s underlying wholesale unsecured markets, and that recently created ‘credit sensitive rates’ (CSRs) risk undermining the progress made during the decade-long LIBOR transition. FSB welcomes IOSCO’s review of CSRs and supports its message that market participants should proceed with caution where they decide to use them.
Robust contractual fallbacks
FSB recalls how at the outset out the LIBOR transition, large numbers of contracts did not make adequate provisions for the permanent cessation of panel-based LIBOR, or for its loss of representativeness. Many fallback arrangements were unsuitable because they were linked to LIBOR or designed to cater only for its temporary outage.
FSB commends the improvements made by trade bodies, particularly ISDA, to fallback provision language where standard form documentation is used.