The Financial Stability
Board (FSB), the international body tasked with coordinating
the work of national financial authorities, has praised the
progress made in reforming major interest rate benchmarks
including the development of alternative risk-free rate
The FSB,chaired by Bank
of England governor Mark Carney, published on Thursday its
interim progress report on reforming major interest rate
benchmarks and the implementation of the FSB recommendations
issued in July 2014.
The report said that in
the past year administrators for the most widely used
Inter-Bank Offered Rates (Libor, Euribor, Tibor) had all taken
major steps to strengthen the benchmarks including reviews of
methodologies, data collection exercises and feasibility
FSB also noted that
although its recommendations were focused on the major
benchmarks many other jurisdictions including Australia,
Canada, Hong Kong, Mexico, Singapore and South Africa had all
taken steps to steps reforming rates in their own
In terms of the
development of alternative risk free rate benchmarks, the
report said national regulators had made "concrete progress in
identifying potential" benchmarks that could prove suitable
risk-free reference rates.
However, the regulator
said national authorities needed to consider the merits of
developing risk free rate across the major currencies to
facilitate cross-currency transactions including FX
In its original report
the FSB recommended the industry adopt a "multi-rate approach,"
involving the strengthening of existing benchmarks and the
development of alternative risk free reference
Risk free reference
rates unlike their IBOR counterparts, which include bank credit
risk, are based on secured credit markets or unsecured
borrowing by sovereigns with little chance of default making
them effectively credit risk free.
Regulators said these
benchmarks would be more appropriate for pricing many
derivatives transactions, particularly as demand and reliance
on secured funding grows.
European authorities the EU Commission, Council and Parliament are
currently finalising the EU’s financial benchmark
rules after a key European parliament vote in May cleared way
for discussions to start.
The rules were originally proposed by the
Commission in September 2013 but since then alternative rules
have been drawn up by the other main EU institutions, the
Parliament and Council.
The reforms in
benchmark regulation will be discussed at length at
FOW’s regulation event being held at the Grange
City Hotel on September 8. To find out more about the event or
to register, please visit FOW Events.