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FSB Letter To ISDA About Derivative Contract Robustness To Risks Of Interest Rate Benchmark Discontinuation

Date 15/03/2019

This letter from the Co-chairs of the FSB’s Official Sector Steering Group (OSSG) encourages the International Swaps and Derivatives Association (ISDA) to continue its work on derivatives contractual robustness to risks of interest rate determination. The letter raises three important issues that the OSSG believes ISDA is moving to address:

  • the addition of other trigger events;

  • the timing for an ISDA consultation on U.S. dollar (USD) LIBOR and certain other key Interbank Offered Rates IBORs;

  • the governance and transparency necessary as ISDA makes its final decisions.

The letter encourages ISDA to ask for market opinion on the events that would trigger a move to the spread-adjusted fallback rate for derivatives referencing IBORs. Triggers that would only take effect on the date on which LIBOR permanently or indefinitely stopped publication could leave those with LIBOR-referencing contracts still exposed to a number of risks. The OSSG also understands that ISDA intends to consult on USD LIBOR, CDOR, HIBOR and SOR in early 2019, and the OSSG strongly supports this. The OSSG Co-chairs also encourage ISDA to consult on the key technical details that ISDA’s Board Benchmark Committee will need to decide on before implementation can begin.

The FSB and member authorities through the OSSG are working to implement and monitor the recommendations of the 2014 FSB report Reforming Major Interest Rate Benchmarks.

Reforming major interest rate benchmarks: Progress report

Annual progress report on implementation of agreed reforms to financial benchmarks.          

 

Since July 2016, ISDA has undertaken work, at the request of the OSSG, to strengthen the robustness of derivatives markets to the discontinuation of widely-used interest rate benchmarks. The OSSG engages regularly with ISDA and other stakeholders with a view to their taking action to enhance contractual robustness in derivatives products and cash products, such as loans, mortgages and floating rate notes.