Interbank Offered Rates (IBORs) have been on the international regulatory agenda since 2008 and headlined since 2012, when the first high-profile LIBOR manipulation settlements were agreed. These systemically important benchmarks, underpinning a market of over $370tn, were proven to be vulnerable to manipulation.
In 2014, the Financial Stability Board (FSB) report recommended improvements to the robustness and governance of existing IBOR methodologies, in line with IOSCO principles and the development of “near risk-free” alternative reference rates (ARRs). Significant progress has been made to date. ARRs have been selected for all major currencies: SONIA (GBP), SOFR (USD), TONA (JPY) and SARON (CHF) – with the exception of Euro.
However, many challenges remain while monetary policy and new capital adequacy rules have continued to reduce the transactions in the unsecured interbank funding market. This prompted the FCA to announce in July 2017 that it would no longer persuade or compel banks to make LIBOR submissions from the end of 2021. In July 2018, both the FCA and CFTC were unequivocal in reemphasising the urgency to act and the inevitability of the discontinuation date. With the deadline for transition to ARRs set, firms must now define their strategy for mobilising and executing the transition.
IBOR Transition could create considerable conduct, reputational, and legal risks. This presents significant challenges for market participants, the greatest of which being the scale of change across all core business lines and functions. A wait-and-see approach to IBOR Transition is not an option.
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