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Interest rate benchmarks after LIBOR

Philippe Shah
Philippe Shah
Regional head of Benchmarks & Indices Asia

The post-LIBOR reform of interest rate benchmarks is a critical milestone for the financial system. A Refinitiv report examines the transition to risk-free rates and how to maintain a term structure for loan markets and others needing forward looking rates.

  1. The reform of interest rate benchmarks is underway, with LIBOR due to be phased out by the end of 2021 and replaced with risk-free rates.
  2. Refinitiv is the largest provider of interest rate benchmarks globally, and is involved in IBORs in a number of markets.
  3. Refinitiv is working with different central banks, regulators and bankers’ associations on the best ways to make interest rate benchmarks more relevant and robust in different markets.

Every country — no matter how big or small — has interest rate benchmarks, which locally can be critical to how the financial system works. They are used for business loans, mortgages, securitization and derivatives.

Whilst the biggest global interest rate benchmarks in markets such as the UK, EU, United States, Japan and Switzerland have had plenty of working groups co-ordinate transition plans for them, smaller markets around the world are sometimes left to their own devices.

What are the different paths that regulators, central banks and industry associations around the world can take to the reform of interest rate benchmarks?

We have put together a review of LIBOR and what the LIBOR transition means for administrators, as well as the services that Refinitiv offers to administrators and owners of benchmark rates.

Read ‘The Impact of LIBOR transition on local interest rate benchmarks’ report.

What was wrong with LIBOR?

A panel of active local banks submitted a rate at which they would be willing to lend to another bank, from an overnight basis up to 12 months.

However, the submission process left benchmarks vulnerable to manipulation, or errors from panel banks. The relevance of benchmarks can also be questioned due to borrowing from central bank, corporates or asset managers.

IMAGE: U.S. interbank lending, which IBORs are traditionally based on, has almost disappeared but deposits have increased to fill the gap. Source: Board of Governors of the Federal Reserve

Since the LIBOR scandals, interbank offered rates (IBORs) have been increasingly scrunitized and regulated. This included the Financial Stability Board publishing recommendations in 2014 for interest rate benchmarks to be strengthened.

In subsequent years various regulators have announced plans to replace, or in the short term, complement IBORs with Risk Free Rates (RFRs).

Maintaining a term structure

One of the big questions is how to replace the ‘curve’ or term structure that IBORs have, if the IBOR itself is no longer based on a significant underlying lending market.

As the number of interbank transactions decreases, it is important for new interest rate benchmarks to capture where funding has moved to.

A number of different options exist:

  1. Using Overnight Index Swaps (OIS) data and add to the RFR.

In certain markets, OIS data referencing an RFR such as SONIA or SOFR can be used to create a term structure.

IMAGE: Volume of interest rate swaps on Tradeweb

  1. Enhancing an existing IBOR.

This involves broadening the scope of an IBOR to capture additional sources of funding, and to look at other related transactions before resorting to expert judgement.

IMAGE: Level of development of derivative markets

Refinitiv and interest rate benchmarks

WORLD IMAGE: Countries in which Refinitiv is involved in the calculation of national benchmarks. Licensed under CCBY-SA

Refinitiv is the largest provider of interest rate benchmarks globally, acting as both an administrator and calculating agent in markets such as Canada, Singapore, Hong Kong and Japan.

  • Refinitiv benchmark administration adheres to the IOSCO principles of financial benchmarks and Refinitiv Benchmark Services Limited is also an authorized benchmark administrator as per the EU Benchmark Regulation.
  • We are working with central banks, regulators and bankers’ associations to discuss interest rate benchmark transition for their markets:
  1. Term Structures: Working with partners such as Tradeweb, central clearing houses and inter dealer brokers to option OIS data for major currencies such as GBP, EUR, USD, JPY and CAD that will be used in addition to existing central bank administered RFR to provide term structures for loan markets and others who need forward looking rates.
  2. New or improved RFRs: For countries with no RFR or looking for operational and administrative improvements to an existing RFR, Refinitiv is able to use transaction data direct from the source to create RFRs.
  3. Evolved IBORs: Waterfall methodologies, robust submitter codes of conduct and post-publication surveillance and monitoring meeting IOSCO principles and EU BMR can be applied to existing IBORs.

Read the full review to get up to speed on LIBOR and find out how the transition from LIBOR is affecting benchmark administrators.