Industry Bodies Publish IBOR-Replacement Roadmap


The International Swaps and Derivatives Association, Inc. (ISDA), the Association of Financial Markets in Europe (AFME), International Capital Market Association (ICMA) and the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG) have today launched a roadmap that highlights key challenges involved in transitioning financial market contracts and practices from interbank offered rates, or ‘IBORs’, to alternative risk-free rates (RFRs).

The benchmark transition roadmap aggregates and summarizes existing information published by regulators and various public-/private-sector RFR working groups in order to provide a single point of reference on the work conducted so far to select alternative RFRs and plan for transition. The analysis focuses on key IBORs in five currencies: euro, sterling, Swiss franc, US dollar and yen. Based on publicly available data, the roadmap estimates total outstanding notional exposure to the IBORs at over $370 trillion. Derivatives, syndicated loans, securitizations, business and retail loans, floating-rate notes (FRNs) and deposits are all significantly exposed to LIBOR and other IBORs.

The roadmap is the first part of a comprehensive analysis of the issues and potential solutions related to RFR transitioning for a wide spectrum of financial instruments. The Associations will shortly initiate a global survey of buy- and sell-side firms and infrastructure providers, which will feed into an in-depth report aimed at supporting industry interest rate benchmark transition planning efforts.

“The task of transitioning from the IBORs to new RFRs is immense, so the industry needs to start thinking about this now. Today’s roadmap is aimed at raising awareness of the work conducted to date, and creating a central resource for interest rate benchmark transitions across market sectors. The next step is to gather feedback from all parts of the market through our global survey to identify all important issues and propose potential solutions for an orderly, efficient and harmonized transition,” said Scott O’Malia, ISDA’s Chief Executive.

“The challenge of transitioning from IBORs to alternative RFRs is a truly global issue that impacts all areas of finance. For the transition to be successful, it is essential that there is coordination across jurisdictions and asset classes. AFME members and their clients are active users of wholesale cash markets products that use various types of reference rates, such as securitizations, FRNs, mortgages, corporate and certain government bonds, as well as derivatives and other products. This report provides an excellent foundation and stocktake for future crucial work on the transition to new risk-free rates,” said Simon Lewis, Chief Executive at AFME.

“Benchmark reform is a global issue for financial markets. ICMA is very pleased to be part of this important international initiative to provide input into the process across market sectors. The launch of the roadmap, which defines the issues involved, is the first step towards coordinating the transition in such a way as to avoid market fragmentation or disruption,” said Martin Scheck, ICMA’s Chief Executive.

“Our members are focused on the identification of challenges related to making any moves to new reference rates in a manner that protects the liquidity and resiliency of both cash and derivatives markets. This initiative will provide information and data that will help inform regulators and the market about both these challenges and begin the process of identifying potential paths forward,” said Kenneth E. Bentsen, Jr., SIFMA president and CEO. “Global communication and coordination within our industry and with regulators is essential, and SIFMA and SIFMA AMG believe the roadmap and subsequent survey will be helpful in this way across the financial industry, to corporate end users, and to regulators. It is crucial to try to achieve some relative consistency across geographical regions, product segments and market participants to both avoid fragmentation of global markets and permit effective risk management.”

The roadmap sets out a number of potential challenges that would need to be addressed when transitioning to RFRs, including market adoption of the new RFRs, valuation and risk management complexities, documentation issues, infrastructure requirements, and regulatory, tax and accounting implications. It also outlines the steps taken by the various public-/private-sector RFR working groups to resolve these challenges.

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