On July 12, 2018, the Financial Stability Board published a statement welcoming the consultation by the International Swaps and Derivatives Association on fallbacks based on overnight risk-free rates for certain derivative contracts. The statement has been issued to provide market participants with the FSB's views ahead of the consultation by ISDA. The FSB's view is that overnight RFRs are more robust than interbank or term rates, because they are based on active and liquid underlying markets. Overnight RFRs are considered by the FSB to be a better choice than term rates for markets where participants do not need forward-looking term rates. The FSB stated that for those markets where the IBOR may cease, citing the example of LIBOR, a transition to new reference rates will be crucial. The FSB acknowledges the work to reform some IBORS excluding LIBOR. It is therefore unclear whether the FSB has factored in the recently announced changes to LIBOR methodology in making this assessment and reaching these conclusions.
The FSB is concerned that RFR-derived term rates may not have sufficient liquidity to support the production of a benchmark across all market conditions and that this fall back, as an alternative to the existing use of IBORs, would not address the systemic risks. Therefore, the FSB welcomes ISDA's consultation on the use of fallbacks based on the overnight RFRs.
The FSB also highlights the need for a transition to new reference rates and thinks that this could best be achieved by including the overnight RFRs as the reference rate in new transactions.
The FSB will publish a full report on progress of benchmark reforms in November 2018.
The FSB's statement is available at: http://www.fsb.org/wp-content/uploads/P120718.pdf and the FSB's press release is available at: http://www.fsb.org/2018/07/fsb-issues-statement-on-reforms-to-interest-rate-benchmarks/.
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