Users Fear New Fees from FSB IBOR Reform

In July 2014, the FSB published a report, Reforming Major Interest Rate Benchmarks, which proposed recommendations for enhancing existing benchmarks for key interbank unsecured lending markets (known as Interbank Offered Rates, or IBORs), and “promoting the development and adoption” of new nearly risk-free benchmark rates called Risk-Free Rates (RFRs).

The FSB’s initial report in July 2014 recommended that IBORs should be underpinned “to the greatest extent possible” with transactions data, and that proposals for enhancements to these benchmarks should be made available for industry consultation by the end of 2015.

In its interim report published on July 9, the FSB stated that administrators of the three main IBORS—LIBOR, EURIBOR and TIBOR—have taken “major steps” towards reform, including reviews of respective benchmark methodologies and definitions, data collection exercises and feasibility studies, consideration of transitional and legal issues, and broad consultations with submitting banks, users and other stakeholders.

In addition, benchmark administrators and market participants from other countries—including Australia, Canada, Hong Kong, Mexico, Singapore and South Africa—have also taken steps towards reforming the existing rates in their own jurisdictions, the report said.

One of the key proposals is to tie existing IBORs as closely as possible to transactions data, creating enhanced rates dubbed “IBOR+.” IBOR administrators have been working with contributing banks, central banks and market participants in the wholesale funding markets over the past year to analyze available transaction data and design new IBOR+ methodologies. The report suggests that administrators should have publicly consulted on any recommended changes by year-end.

Meanwhile, the Official Sector Steering Group (OSSG) for the reforms has made progress in identifying potential RFRs. “In particular, detailed data collection exercises have been undertaken in key markets, and work is now underway to identify potential RFRs, where these do not currently exist,” the report adds.

In its January 2015 Top Ten Trends in Institutional Securities & Investments report, research firm Aite Group stated that it was time for the capital markets community to come up with an alternative process to establish a daily benchmarking rate. Aite analyst Howard Tai says it’s no surprise that the FSB’s interim report confirms that new rates will use an automated calculation mechanism based on actual traded prices versus indicative quotes. 

“The method of collecting actionable, transactional-based market data will always be the key in establishing credibility in the market participants’ eyes for whichever benchmark rate that they may finally go with,” Tai says.

While the FSB report has provided transparency around the timeline for the reforms, some industry participants have voiced concerns about whether the introduction of new and enhanced rates will prompt administrators and market data vendors to begin charging for additional benchmark calculation services.

However, in the meantime, the interim report will at least allow end users to get a handle on the benchmarks that will be affected and timelines for implementation, so they can factor changes into their market data budgets, says one European market data manager.

Looking forward, the OSSG will continue to monitor progress in implementing the FSB’s recommendations over the coming year, and will prepare an updated progress report for publication by the FSB in July 2016.

“In the second half of 2015, IOSCO will commence a follow-up review of steps taken by EURIBOR, LIBOR and TIBOR administrators to further assess the degree of implementation of its Principles since July 2014. This second review will seek to identify whether administrators have made progress in addressing the recommended remediation work set out in IOSCO’s first review report, which was published in July 2014,” the report says.