The Financial Stability Board has released a progress report to the G20 on
LIBOR transition, encouraging financial authorities to set global consistent milestones that will accelerate moves away from LIBOR.
The international body, which advises on financial stability through co-ordinating the activities of national supervisory authorities and standard-setting bodies, says: “Financial and non-financial institutions need to accelerate adoption of robust benchmark rates in new contracts, as well as active conversion of legacy LIBOR-referencing contracts to directly reference risk-free rates and/or insert robust fallback language.”
Many LIBOR panels will no longer operate from the end of 2021, with some USD settings being retained until June 2023 to enable an efficient wind down of legacy contracts.
The FSB has regularly highlighted the decline in liquidity in interbank unsecured funding markets, which provide the foundation for interbank borrowing rate (IBOR) benchmarks, since the 2008 financial crisis.
“Published data show that LIBOR rates are largely reliant on judgement-based submissions rather than on market transitions, demonstrating that interbank unsecured funding markets are an unsustainable reference source,” says the FSB.
The report underlines that the tools required to fulfil this transition have been in place for some time. During the past few years, market participants have set in place mechanisms to employ compounded risk-free rates in derivatives markets, where use of RFRs was already widely established, but also in cash markets, says the report.
Against this background, it finds that loan markets remain an area of significant concern, with new lending still taking place that is referenced to LIBOR.
The FSB report says that a smooth and orderly transition away from LIBOR requires, at minimum, a commitment to stop issuance of new products that are linked to LIBOR and steps to move away from LIBOR for legacy contracts wherever this is practical.
With the end of 2021 fast approaching, the FSB encourages market participants to act immediately to fulfil the steps to transition laid down in its Global Transition Roadmap, which it has recently updated.
It urges regulatory authorities to ratchet up their communication to raise awareness of the urgency of IBOR transitions for all market participants.
Through its Regional Consultative Groups, the FSB will support the transition process in emerging markets, where it found that “engagement with financial institutions on transition planning is generally lagging”.
Bank of England governor Andrew Bailey, who is co-chair of the FSB Official Sector Steering Group, says: “We are now in the final chapter in the global process to transition markets from LIBOR rates. Basing reference rates on insufficiently active markets creates a fundamental weakness and transition from LIBOR needs to focus on addressing this.”
“Using robust overnight risk-free rates that are based on large flows of actual transactions will help to create a more resilient and transparent financial system,” adds Bailey.
His fellow co-chair and Federal Reserve Bank of New York president John C Williams, says: “For the sake of global financial stability choose robust enduring reference rates. For US dollar LIBOR, that means building the transition on an unshakable SOFR [secured overnight financing rate] foundation.”
“In these final months until [cessation of] LIBOR, remember we never want to repeat this transition again,” concludes Williams.
