In a progress report on global transition efforts, the FSB highlights slower progress in loan markets, which it says must be addressed urgently.
The FSB (Financial Stability Board) on Friday (20 November) published a progress report on implementation of reforms to major interest rate benchmarks.
“With only one year left, all market participants – both financial and non-financial firms across the globe – must now ensure they follow the necessary steps to avoid disruption to the performance of their contracts,” the FSB says.
To support this process, the FSB released a global transition roadmap in October setting out the high-level steps firms will need to take now and over the course of 2021 to complete their transition.
“For transition to occur on time, market participants will need to cease use of LIBOR as a benchmark in all new activity across global markets as soon as possible and this needs to be a key priority for the months ahead,” the FSB said.
The report highlights proposals by authorities and national working groups including in the US, UK and EU to help manage an orderly wind-down of LIBOR and, in particular, to provide a legislative solution for tough legacy contracts.
However, it says, market participants should continue to progress their transition efforts and plans proactively, particularly through active conversion and the insertion of robust and workable fallbacks where feasible.
Consistent with this, ICE Benchmark Administration (IBA) – the administrator of LIBOR – on Wednesday (18 November) announced that it will consult on its intention that the EUR, GBP, CHF and JPY LIBOR panels would cease at end-2021. Announcements in relation to USD LIBOR are expected to follow.
In its role as regulator of IBA, the UK FCA (Financial Conduct Authority) has also set out its potential approach for use of new powers under proposed UK legislation to ensure an orderly wind down of LIBOR and published consultations on its proposed policies for using them.
The report also highlights slower progress in loan markets as a result of the need to upgrade underlying infrastructure and engage with a broad customer base.
“The most prominent outstanding area of LIBOR dependence is in global lending markets, where it remains the default benchmark for much new lending as well as in a large volume of legacy contracts,” the report says.
“Successful transition in these markets remains a significant challenge given the remaining time available, so market participants must now act quickly to move new business onto alternative rates.”
This will require banks to engage in detail with a wide range of customers to ensure they are appropriately informed, treated fairly, and understand any steps they will need to take themselves to be able to use alternative products.
In derivatives markets, the FSB welcomes the release of ISDA’s updated documentation and strongly encourages all market participants to consider adhering as soon as possible to the Protocol as a means to mitigate risks in legacy contracts.
Equivalent provisions are also needed in respect of cleared and exchange-traded derivative contracts, which are not governed by ISDA documentation and account for a large majority of the total outstanding notional value, the report says.
The FSB therefore encourages all providers of cleared or exchange-traded LIBOR-linked derivatives to implement these measures as part of their rulebooks and ensure the outcomes are clearly understood by users.