During a Financial Stability Board (“FSB”) roundtable discussion, global regulators cited progress on the transition away from LIBOR to alternative risk-free, benchmark interest rates.
CFTC Chair J. Christopher Giancarlo described growing evidence of a “shift in sentiment” among market participants from “why are we moving away from LIBOR” to “how do we adopt SOFR [Secured Overnight Finance Rate]”. He noted that the CFTC’s expectations in the next year are that the SOFR futures and swaps and related debt markets will hit levels where “liquidity begets liquidity.”
Mr. Giancarlo highlighted “the hugely important work by ISDA on new fallback language and triggers, both pre- and post-cessation, for OTC derivatives.” He emphasized: “We would like to make sure that all market participants participate in the protocol to adopt the new language.”
In addition, Mr. Giancarlo offered an “official sector perspective,” stating “we collectively stand ready to provide any guidance, relief, and other support required. While there is strong interest in addressing regulatory hurdles, we are also open to suggestions on regulatory tools to incentivize transition to SOFR-based benchmarks.”
FSB Chair Randal Quarles (Federal Reserve Board Vice Chair for Supervision) criticized LIBOR as a “poorly structured rate” that is based on an underlying market with few transactions. He stated that the national working groups called together by many of the FSB member authorities have conducted diligence with the SOFR and the risk-free rates in other jurisdictions. Mr. Quarles noted that April marks the one-year anniversary of SOFR and outlined accomplishments, including the establishment of new futures markets, cleared swaps markets and debt markets based on these new rates. He stressed that, because LIBOR could potentially end in a little over two years, the transition should “accelerate” and the private sector must shoulder the burden.
Financial Conduct Authority CEO Andrew Bailey, Bank of England Deputy Governor David Ramsden, Governing Board of the Swiss National Bank Chair Thomas Jordan, U.S. Treasury Secretary Counsellor Craig Phillips, and other FSB members and officials took part in the roundtable discussion.
Commentary / Lary Stromfeld
While public and private sector participants continue to tackle the big issues raised by replacing “the world’s most important number” (LIBOR), statements coming out of the Roundtable held this week reveal that the devil also lies in the details. For example, Chairman Giancarlo reiterated the regulators’ support for derivatives to include a “pre-cessation” fallback trigger to align with the language being developed by the ARRC’s various cash product working groups.
On the other hand, ISDA’s intentions with regard to a pre-cessation trigger are more measured, calling for a consultation that explains that such a trigger could affect adherence to the fallback protocol for legacy derivatives and increase the risk that new and legacy derivative transactions may not be aligned. Finding the proper balance across products will present an on-going challenge for all market participants seeking to minimize basis risk.
Separately, it was interesting to see Chairman Giancarlo open the door for regulatory “guidance, relief, and other support” as well as “regulatory tools to incentivize transition to SOFR-based benchmarks.”