HL Summary FSB Reforming Major Interest Rate Benchmarks 2020

HIGH LEVEL SUMMARY of FSB published Reforming Major Interest Rate Benchmarks 2020 Progress report “The year of transition away from LIBOR”

LIBOR/RFRs & COVID19 (pp.1-2)

• The direct correlation between LIBOR and banks’ overall borrowing costs weakened during the global financial crisis – given a much lower dependence on the short term unsecured markets that LIBOR seeks to measure – and has arguably weakened further since. As the FSB observed in July, the market volatility associated with COVID-19 highlighted that the underlying markets LIBOR seeks to measure are no longer sufficiently active, nor are they the main markets that banks rely upon for funding. The increase in the most widely used LIBOR rates in March 2020 put upward pressure on the financing cost of those paying LIBOR-based rates. While central bank policy rates were being reduced globally, LIBOR rates increased and those increases were passed on to end users of the financial system at a time when the financial system ought to have played a key role to facilitate liquidity during the COVID-19 disruptions. For those borrowers, at the height of the disruption these increases offset in large part the reductions in interest rates in those jurisdictions where central banks lowered policy rates. By contrast, preferred RFRs based on overnight rates continued to function and, in many cases, the volumes underpinning them rose.
• Other measures, which purport to measure bank credit risk in the same way as is currently done in LIBOR, are potentially subject to similar challenges. The FSB has discussed the outstanding question of how credit sensitive rates can be created without replicating the same weaknesses as LIBOR. Any exploration of whether new robust credit sensitive benchmarks can be developed should occur without obstructing transition by end-2021.
• Market moves since the COVID-19 outbreak have also highlighted some advantages from the selection of SONIA as the successor to sterling LIBOR. Throughout the period of market volatility related to COVID-19, SONIA closely tracked the Bank Rate. Transaction volumes in the underlying overnight unsecured market increased from ￡43bn in the month prior to the market turbulence to over ￡60bn. LIBOR rates on the other hand increased in the second half of March 2020, while central bank policy rates were being reduced and underlying transactions were diminished. In its May 2020 Interim Financial Stability Report, the Bank of England stated: “Recent market volatility has highlighted the long-standing weaknesses of LIBOR benchmarks, which remain in widespread use. LIBOR rates – and hence costs for borrowers – rose as central bank policy rates fell, and underlying market activity was low. This has reinforced the importance of completing the transition to alternative rates by end-2021.”68

CHALLENGES 

• The most prominent outstanding area of LIBOR dependence is in global lending markets, where it remains the default benchmark for much new lending as well as in a large volume of legacy contracts. The foundational work required for transition in these markets has lagged the pace of progress in other areas for some time but has now been completed in many areas including, for example, the release of recommended conventions for use of RFRs in new products. Successful transition in these markets remains a significant challenge given the remaining time available, so market participants must now act quickly to move new business onto alternative rates. This will require banks to engage in detail with a wide range of customers to ensure they are appropriately informed, treated fairly, and understand any steps they will need to take themselves to be able to use alternative products.

G20 REPORT (p.2)

• The report recommended that authorities establish and, where relevant, discuss with National Working Groups (NWGs) a formal LIBOR transition strategy. This might include interacting with NWGs with a view to set out milestones and a transition roadmap with clearly specified actions market participants should take. To support and facilitate transition, the FSB has developed a global transition roadmap setting out high-level steps to be taken ahead of end-2021. While recognising that the transition timelines in different jurisdictions respond to the needs and specific institutional and legal conditions, this roadmap is intended to inform firms of some of the steps they should be taking now and over the remaining period to end-2021 to successfully mitigate risks to global financial stability. These are considered prudent steps to take to ensure an orderly transition by end-2021 and are intended to supplement existing timelines/milestones from industry working groups and regulators.

TOUGH LEGACY PRODUCTS (p.10)

• A legislative solution for tough legacy contracts that will enable market participants to achieve fair and effective outcomes for their contracts. Whilst differences in scope across jurisdictions may arise, tough legacy contracts are considered those contracts that have no or inappropriate fallbacks, and cannot realistically be renegotiated or amended. Authorities across jurisdictions have stressed that the importance of active, market-led transition remains and work to substitute existing LIBOR references or to adopt sufficiently robust fallbacks should continue. Where contracts do not fall within the narrow pool of tough legacy contracts and, for example, can feasibly be converted by bilateral or multilateral agreement, market participants are expected to continue to progress their transition efforts and plans and to meet their regulatory obligations, particularly through active conversion and the insertion of robust and workable fallbacks. This is the only way for parties to have certainty about contractual continuity and control over their contractual terms when LIBOR ceases or is no longer representative. Authorities will continue dialogue and cooperation internationally on proposed solutions across borders, taking account of international transition efforts and impacts.

REGULATORY (pp.10-11)

• The FSB and BCBS July report on supervisory issue related to benchmark transition followed a globally coordinated survey and quantitative data collection to help ensure that the appropriate supervisory and regulatory measures are taken across jurisdictions. The report highlighted gaps in quantifying LIBOR exposures and in the status of fallback adoption and that a considerable portion of FIs, particularly in non-LIBOR jurisdictions, have yet to start or are still planning their transition. The report laid out three sets of recommendations for supervisory authorities in particular: 
• Identification of transition risks and challenges – authorities and standard-setting bodies to issue public statements to promote awareness and engage with trade associations, and authorities to undertake regular surveys of LIBOR exposure and to request updates from financial institutions. 
• Facilitation of LIBOR transition – authorities to establish a formal transition strategy supported by adequate resources and industry dialogue. Supervisory authorities should consider increasing the intensity of supervisory actions when the preparatory work of individual banks is unsatisfactory. 
• Coordination – authorities to promote industry-wide coordination, maintain dialogue on the adoption of fallback language, consider identifying legislative solutions where necessary, and exchange information on best practices and challenges. 
• The next step for the FSB, in collaboration with other international bodies and standard setting bodies (SSBs), is to design key metrics to assess global LIBOR exposures and transition status over the coming period, and a list of qualitative questions to monitor progress in implementing the recommendations. An updated assessment of LIBOR transition progress will be provided by early next year.

USD LIBOR (pp. 14-17)

OVERVIEW

The jurisdiction of highest concern from a financial markets stability perspective it has the largest exposure to LIBOR and the most work to be completed. USD LIBOR will be discontinued on December 31, 2021 replaced by SOFR which is a new risk free rate which was first published July 2018. 

WORK IN PROGRESS 

• Progress has accelerated since Tom Wipf became AARC chair in 2019.
• May 2020 The ARRC released best practice recommendations35 in late May to support the industry transition. The recommended best practices set out general recommendations as well as product specific timelines that firms can choose to adopt to support the transition including, but not limited to: 
• Incorporation of ARRC-recommended fallback language for newly issued FRNs, residential ARMs and securitizations with maturities beyond end 2021 by 30 June 2020 and incorporation of ARRC-recommended hardwired fallback language for syndicated business loans and bilateral business loans with maturities beyond end 2021 by 30 September 2020 and 31 October 2020, respectively. 
• Completion of all necessary enhancements by third-party technology and operations vendors relevant to the transition to support SOFR by 30 June 30 2020 for FRNs, by 30 September 2020 for business loans and residential ARMs, and by 31 December 2020 for securitizations 
• Adherence to the ISDA fallback protocol within the 3- to 4-month period after it is published and before the amendments to embed the fallbacks in legacy transactions take effect, encouraging dealers and firms with significant derivatives exposures to do so during the escrow period, and dealer offering of electronic market making in SOFR derivatives by 30 September 2020, 
• No new issuances of LIBOR-linked contracts maturing beyond end-2021 by 30September 2020 for new LIBOR ARMs, by 31December 2020 for new FRNs, by June 30, 2021for new business loans and new non-CLO securitizations and derivatives, and by 30September 2021 for CLO securitizations.
• Consistent with its 2020 objectives, the ARRC launched two Requests for Proposals to select both an administrator to publish the ARRC’s recommended spread adjustments (and the associated spread adjusted rates) for cash products and a potential administrator of ARRC-recommended forwardlooking SOFR term rates41 to be published in the first half of 2021 if liquidity in SOFR derivatives markets has developed sufficiently.
• the ARRC published draft New York state legislation as a potential approach to help address challenges surrounding tough legacy contracts governed by New York law. 

MILESTONES 

In February, the FHFA announced that the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will stop accepting adjustable-rate mortgages (ARMs) based on LIBOR by the end of 2020, and the GSEs’ announced that they plan to begin accepting ARMs based on the Secured Overnight Financing Rate (SOFR) later in 2020.

• In March 2020, the Federal Reserve Bank of New York, as administrator of SOFR and in cooperation with the Treasury Department's Office of Financial Research (OFR), began to publish 30-, 90-, and 180-day SOFR Averages as well as a SOFR Index, in order to support a successful transition away from U.S. dollar (USD) LIBOR.
• In October the CCPs (LCH/CME) completed the big-bang switch to SOFR discounting. The cleared swaps discounting change from EFFR to SOFR is broadly expected to boost liquidity in SOFR derivatives though the development of the SOFR loan market remains the most broadly cited requirement for derivative market growth. SOFR liquidity has continued to increase, although it remains less liquid than U.S. dollar LIBOR. 
• CME now offers SOFR options, helping to establish a SOFR volatility curve. 
• The total amount of SOFR-based debt issued exceeds $750 billion, roughly double the amount at the start of the year. 

NEXT STEPS 

• Prioritized ongoing areas of focus include: movement of legacy derivative positions from LIBOR to SOFR before end-2021; development of tools to support operational and infrastructure preparedness; work on potential legislative relief for legacy contracts that may be otherwise difficult to amend and that do not have economically appropriate fallbacks; continued work on tax, regulatory and accounting measures to support the transition; and finally broad outreach and education around transition work.

STATUS: LEADING

EUROPE [EURIBOR/EONIA to €STR] (pp. 17-20)

OVERVIEW

The EU is currently and should remain beyond 2021 a multi-rate jurisdiction. The working group on euro risk free rates was formed to guide the transition. €STR the new euro risk free rate has been published since October 2019, it is an unsecured rate. €STR will replace EONIA in the immediate time-frame (January 2022) and will be coordinated to replace EURIBOR in the future.

WORK IN PROGRESS

• Transition efforts are focused on (i) completing the switchover from EONIA to the €STR and thus developing deeper €STR liquidity and (ii) adopting €STR-based fallback rates for EURIBOR to cater for a scenario in which the benchmark may cease to exist. 
• In the course of 2020, the progress on euro benchmarks reform was slowed down by roughly six months owing to the Covid-19 crisis and related market situation. The working group on risk free rates adjusted its planning for its upcoming deliverables, and notably for the work stream on EURIBOR fallbacks. 
• On 16 June 2020, the working group endorsed a recommendation that counterparties voluntarily exchange compensation for legacy swaption contracts affected by the transition of central counterparty discounting from the EONIA to the €STR. The working group’s recommendation was based on the feedback received from the public consultation on this matter launched in March 2020. 

MILESTONES

• July 2020 LCH and CME switch of the discounting curve from EONIA to a €STR curve. The CCPs switch is expected to encourage users to amend their bilateral Credit Support Annexes (CSAs) to replace EONIA with €STR, which should in turn give a boost to €STR-based OIS market activity. 

NEXT STEPS

• 23- November-20 Two Public Consultations announced (i) EURIBOR fallback trigger events and (ii) EURIBOR fallback rates and spread adjustment. 
• €STR-based term rates are expected to apply as fallback rates for the widely used IBOR in the euro area, EURIBOR, to cater for a scenario in which the benchmark may cease to exist. 
• Continued development of sufficient market activity linked to the €STR in cash and derivatives markets is key in achieving the overarching objective of benchmark reform: to reduce the risks related to the reliance on IBORs by making greater use of risk-free rates and adopting workable fallback provisions.

STATUS: LAGGING

JAPAN [JPY LIBOR to TIBOR/TONA(R)] (pp. 20-22)

OVERVIEW

Japan is and will remain a multi-rate jurisdiction. It will be discontinuing JPY LIBOR in favour of other domestic rates. The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks (the Committee) was established in August 2018 to select a rate for JPY market participants.

WORK IN PROGRESS

• Effort to develop Term Reference Rates based on the JPY OIS.
• Work on improving the robustness of contractual language.
• The Committee has deliberated on new key milestones for cash products to ensure smooth transition away from LIBOR before end-2021. 
• In March 2020, the JFSA and the BOJ jointly published “Summary of Survey Results on the Use of LIBOR and Main Actions Needed” conducted in October 2019 asked 278 financial institutions about their quantitative LIBOR exposures and their qualitative LIBOR transition progress. Another survey is planned to follow up the progress and status of LIBOR transition.
• In June 2020, the JFSA and the BOJ sent a joint letter to the CEOs of major financial institutions regarding LIBOR transition. While the letters have been sent to major financial institutions, the JFSA and the BOJ will also monitor preparedness of other financial institutions based on the contents of the letters in order to urge them to take actions for permanent cessation of LIBOR.

MILESTONES

• In February 2020, the Committee determined that QUICK Corp. was suitable as a calculating and publishing entity of prototype rates for Term Reference Rates.
• In May 2020, the QUICK Corp began publishing prototype rates on a weekly basis. 
• In October 2020, it began publishing prototype rates on a daily basis, which are available on the website of QUICK Corp., as well as on the BOJ's website. 

NEXT STEPS 

• Production Term Reference rates to be published no later than mid-2021. 
• Continued monitoring and consultations (public consultations on fallback rates and spread adjustments for loans and bonds).

STATUS: LAGGING 

GREAT BRITIAN [GBP LIBOR to SONIA] (pp.22-27)

OVERVIEW

The market for SONIA derivatives is well established and GBP LIBOR is significantly in the wane. The two rates have co-existed for some time now and SONIA has become the predominant rate in Capital Markets. The BOE formed the Sterling Risk Free Rate Working Group in 2015 to address concerns over LIBOR. It is worth noting excluding some CLOs, ABSs and private placements, all new sterling bond issues in the form of FRNs, and most securitisations, have been referencing SONIA rather than LIBOR since June 2018.

WORK IN PROGRESS

• By end-Q1 2021, for lenders and borrowers take necessary steps to cease issuance of LIBOR linked loan products that expire after end of 2021, including by end-Q3 2020 making non-LIBOR alternatives available and including contractual conversion mechanisms in new or refinanced LIBOR products; 
• To take steps throughout 2020 to promote & enable widespread use of SONIA compounded in arrears; 
• To take steps to enable a further shift of volumes from GBP LIBOR to SONIA in derivative markets; 
• To establish a clear framework to manage transition of legacy LIBOR products, to accelerate reduction of stock of GBP LIBOR referencing contracts by end-Q1 2021 and complete active conversion where viable by end-Q2/3 2021; 
• To provide market input on issues around ‘tough legacy”’. The Bank of England and the Financial Conduct Authority (‘FCA’) have supported these objectives, notably through a joint January 2020 letter to responsible Senior Managers at the largest supervised firms setting out initial expectations of transition progress for 2020, including for ‘all firms to play their part in meeting these [RFRWG] targets’.
• In January 2020, the FCA and Bank of England published a joint statement encouraging market makers to change market convention for sterling interest rate swaps from LIBOR to SONIA in Q1 2020 as best practise recommendation. 
• At the beginning of 2020, the RFRWG initiated three new task forces focusing on (i) enablers to moving new loans issuance away from GBP LIBOR; ii) frameworks to support transition of legacy cash products; and; iii) providing market input regarding the ‘tough legacy’ of products that may prove unable to be converted or amended to include robust fallbacks. A fourth new task force working to progress and raise awareness of conventions for new sterling RFR-based non-linear derivatives and support discussions on the transition of legacy LIBOR products in these markets was set up in July 2020.
• The Term Rate Use Case Task Force The finding sare set out in a January 2020 paper on use cases of benchmark rates including term rate. Key findings were as follows: 
• The Task Force considered that use of SONIA compounded in arrears was appropriate and likely operationally achievable for approximately 90% by value of the sterling LIBOR loan market sampled and that the remaining 10% by total loan value would likely require alternative rates. The 10% requiring alternative rates consisted primarily of lower value loans to a wide range of smaller borrowers and therefore accounted for a somewhat greater proportion when measured by borrower numbers rather than total loan values. 
• It was noted that smaller corporate and retail clients for whom simplicity and/or payment certainty is a key factor may wish to consider alternative rates such as a fixed rate, Bank Rate, or a SONIA term rate, if available. 
• To continue with the current market practice, it was recognised that alternative rates should also be considered for trade and working capital, which use discounted cash flows and therefore require a forward-looking term rate with the ability to interpolate mid period dates, and Islamic finance which can pay variable rates of return so long as the variable element is pre-determined. 
• In July 2020 the RFRWG published an updated version of its roadmap and top level priorities for 2020 in order to clarify actions market participants should take to reduce LIBOR exposure and transition to alternative rates. 
• May 2020 The task force focusing on tough legacy delivered its mandate through the publication in May 2020 of a paper on the identification of Tough Legacy issues. The paper concluded that there was a case for action to address ‘tough legacy’ exposures in the UK. Task Force proposed that the UK government consider legislation to address ‘tough legacy’ exposures, whilst recognising that there was no guarantee that such a solution will materialise, that it will materialise across all relevant legal jurisdictions, or that it would be available for all products and circumstances. 
• 23 of June 2020, the UK government announced plans for enhancing the FCA’s powers to deal with the winding down of critical benchmarks. For more on this please refer to the subsection titled ‘the future of LIBOR’.
• In September 2020 The task force focusing on new loans produced a Frequently Asked Questions document clarifying several aspects of the RFRWG’s 29 April statement on ceasing LIBOR-linked lending and recommendations for SONIA loan market conventions.
• Also in September 2020 The task force focusing on legacy cash products published two discussion papers intending to familiarise firms with the fundamentals of active conversion of GBP referencing bonds and loans. 
• Sterling RFRWG has published two papers: i) a summary of the freely available independent RFR calculators on the market and ii) a summary of the key attributes of beta versions of TSRRs published by independent benchmark administrators.

MILESTONES

• In March, the first multi-currency revolving credit facility to be linked to both SONIA and SOFR was signed by British American Tobacco, consisting of a ￡3bn 364-day facility and a ￡3bn 5- year facility. The British Riverside Group announced the UK housing sector’s first SONIA loan facility had completed in April. Since markets have calmed, momentum has continued, with GlaxoSmithKline refinancing two revolving credit facilities provided by 12 banks, consisting of a $2.5 billion 364-day facility and ￡1.9 billion multi-currency 3-year facility. These agreements now include fixed spread adjustments for SOFR and SONIA respectively. More generally, a regularly updated list of RFR referencing syndicated and bilateral loans is available from the Loan Market Association, 79 highlighting conventions and terms used which could be replicated by other issuers going forward.
• In June 2020, the Bank of England published a response to the feedback received on its discussion paper titled ‘Supporting Risk Free Rate transition through the provision of compounded SONIA. Given near-unanimous support, the Bank confirmed that it was to produce a daily, free to use, ‘golden source’ SONIA Compounded Index using the methodology described in the paper. 
• In August 2020 the Bank commenced publication of the daily Index in August 2020. The Bank also confirmed it was not to be producing ‘period averages’ at this time. This reflected a lack of consensus from respondents on both the usefulness of period averages and on the conventions underpinning such rates.
• In August 2020, the first bond issue was completed referencing the Bank of England’s SONIA compounded index.
• In September 2020 the RFRWG also released a recommendation on standard market conventions for sterling loans based on compounded in arrears SONIA to support the urgent transition away from the use of LIBOR, particularly with respect to the RFRWG’s target for lenders to be able to offer non-LIBOR alternatives to customers by the end Q3 2020. The recommendation took into account the overall needs of the sterling loan market as well as a variety of system infrastructure implementation considerations.

NEXT STEPS

• TSRRs are expected to be available for market participants to use in contracts by end Q1- 2021. three benchmark administrators (FTSE Russell, ICE Benchmark Administration, Refinitiv) have begun publishing TSRRs in ‘beta’ form, and are not to be used in contracts. The beta period of observation is expected to last for approximately 6 months to allow market participants to understand and assess the nature and behaviour of these rates before contractual usage in products can commence.
• The RFRWG will continue to work on delivering its top-level priorities for 2020-21. In terms of market progress, key areas of ongoing focus are delivering transition in the GBP loan market, encouraging broad adoption of the ISDA protocol, engineering a further shift in derivatives volumes, and engagement on the approach for dealing with tough legacy exposures

STATUS: LEADING

SWITZERLAND [CHF LIBOR to SARON] (pp.27-29)

OVERVIEW 

The Swiss market while significant is overall not very liquid. In October 2017, the Swiss National Working Group (Swiss NWG) on Swiss Franc Reference Rates recommended the Swiss Average Rate Overnight (SARON) as the alternative to the CHF LIBOR. SARON is a secured rate. The Swiss market decided early on to eschew term rates in favour of compounded rates in arrears. 

WORK IN PROGRESS

• Liquidity in the SARON based derivatives market slightly increased over the year but remained far lower than in the CHF LIBOR based derivatives market. 
• In May 2020 NWG recommended to use the lookback option with an offset of five business days for CHF syndicated loans and released a term sheet for a SARON / SOFR cross currency basis swap. The Swiss Financial Market Supervisory Authority (FINMA) reiterated its expectation that market participants undertake all necessary steps to ensure CHF LIBOR is replaced, latest until year-end 2021. The Swiss NWG also reported, based on the results of a webinar conducted in February 2020, that the majority of software providers for banks had implemented the options for compounded SARON.
• The Swiss NWG had a second meeting in September 2020, where it underlined its expectation that CHF LIBOR will be discontinued by the end of 2021. The Swiss NWG also stated that a CHF “synthetic LIBOR” is not expected. The Swiss NWG recommended, together with FINMA and the SNB, to adhere to ISDA’s protocol as soon as possible, by its effective date at the latest. Additionally, it was recommended to incorporate similar contract amendments, such as, for example for the Swiss Master Agreement, in order to ensure robust fallback languages in all other contracts. In addition, the NWG gave further guidance on the fallback language of cash products. The guidance was that compounded SARON plus ISDA’s spread adjustment can be used as a fallback rate. The spread can be neglected for simplification if it is beneficial for the customer. The fallback language proposed for mortgages can also be used for bilateral loans to corporates or SMEs. The Swiss NWG also reviewed its recommendation on syndicated loans from the May 2020 meeting and concluded that in cases where international consistency is important, the ‘lag’ methodology and flooring individual SARON values are viable alternatives. However, the NWG repeated the recommendation to use the “shift” methodology and to floor the compounded SARON, as long as the domestic market is in the focus.

MILESTONES

• During 2020, several small and large banks launched SARON based mortgages and corporate loans by using one of the three mentioned options for compounded SARON. Banks reported that the customer take-up is positive and that no issues arose with an interest rate payment known at the end of the interest period. 
• In March 2020 the The administrator of SARON, the SIX Swiss Exchange (SIX), launched socalled SARON Compound Rates. The SARON Compound Rates are standardised term rates published each business day, e.g. “SARON 3 months Compound Rate”. 
• in September 2020 SIX launched a free to use web-based calculator, which can for instance be used by retail clients to verify the compounded SARON charged by the lender. 

NEXT STEPS

• It is expected that further banks will launch SARON based cash products and that remaining LIBOR based mortgages will be converted to SARON based mortgages until the end of 2021.

STATUS: LEADING

AUSTRALIA [BBSW/AONIA] (pp.29-31)

OVERVIEW 

Australia formed the IBOR Transformation Working Group in December 2019. Australia will remain a multi-rate jurisdiction with short-term bank wholesale funding costs (having a credit premium) represented by the Bank Bill Swap Rate (BBSW) and the RBA Cash Rate (an risk free rate) also known as AONIA (AUD Overnight Index Average) also being utilized. Market participants will be free to choose between the two which they deem most appropriate to reference by product.  

WORK IN PROGRESS

• The initial focus of the IBOR Transformation Working was (1) Conduct risk and (2) client communications.
• In April 2020, the Australian Securities and Investments Commission (ASIC), together with the Australian Prudential Regulation Authority (APRA) and the RBA, released the feedback on responses to the Dear CEO letters sent in 2019 to major Australian financial institutions regarding their preparations for the end of LIBOR. Overall results were unbalanced.
• Institutions were provided with individual feedback from ASIC and APRA in the form of a plan for ongoing direct engagement on these issues. Best practice examples and conduct risk mitigation measures. were also published. 
• ASIC has also subsequently sent a letter to the largest 100 corporations to highlight the need to plan for LIBOR transition and to encourage entities to start the transition early. Some investors have expressed interest in term RFRs with similar tenors to LIBOR and BBSW (the Australian dollar credit-based benchmark), and in credit-sensitive spreads to RFRs for use as alternative benchmarks. 

NEXT STEPS

• ASIC and APRA will continue to monitor industry developments and, where appropriate, engage with relevant stakeholders to seek assurance that appropriate progress in LIBOR transition is being made. 
• RBA, ASIC and APRA will also continue to raise industry awareness of the importance and urgency of transitioning to alternative rates where possible and the inclusion of robust fallback provisions in all contracts where feasible. 
• Going forward the RBA will be requiring all new FRNs referencing BBSW to include the ISDA fallback provisions in order to be eligible for use as collateral in RBA operations; and expecting all users of BBSW to adopt the fall-back provisions where possible. The RBA is consulting industry before determining the scope and timing of implementation of these requirements.

CANADA [CDOR and CORRA] (pp.32-34)

OVERVIEW 

In Canada the Canadian Dollar Offered Rate (CDOR) and fhe Canadian Overnight Repo Rate Average (CORRA) have co-existed for some time. Canada formed the Canadian Alternative Reference Rate Working Group (CARR) in 2018 to enhance CORRA with an eye to promote its use in capital markets with expectations that it will become the predominant rate. Canada however will remain a multi-rate jurisdiction. Currently, the Canadian financial system does not have any specific benchmark regulation. 

WORK IN PROGRESS

• Continued work by CARR to enhance both benchmark rates. 
• Securities regulators in Canada are currently targeting to publish the final Canadian rule on financial benchmarks in early 2021. 

MILESTONES

• January 2020 first CORRA/SOFR cross currency swap between JP morgan and National Bank, 2 year $5M CAD.  
• June 2020 a CORRA 3-month futures contract, which was launched by the Montreal Exchange, a Canadian derivatives exchange also in June 2020 in conjunction with the Bank of Canada took over the administration of CORRA.
• November 2020 CDOR administrator Refinitiv announced that, with a six-month notice period, it would discontinue the 6- and 12-month CDOR tenors, and would deliberate further on whether to delay the individual bank CDOR submissions.

NEXT STEPS 

• Continued work and industry consultations where appropriate on issues including the enhancement of existing benchmarks.

HONG KONG [HIBOR to HONIA] (p.34)

OVERVIEW 

Hong Kong will remain a multi-rate jurisdiction using HIBOR the incumbent IBOR and the risk free rate HONIA. Market participants are be free to choose between them. The Treasury Market Association has formed the Working Group on Alternative Reference Rates.  

WORK IN PROGRESS

• The Hong Kong Monetary Authority (HKMA) and the Treasury Markets Association (TMA) coordinating in tandem to engage different stakeholders with a focus on awareness and readiness for the LIBOR transition.  
• HKMA has been active in monitoring stakeholder progress to date. 
• The plan is to enhance both HONIA and HIBOR. 

MILESTONES

• 8-October-20 Tradition (Asia) Ltd in Hong Kong, an HKMA Approved Money Broker executed the first HONIA vs SOFR cross-currency basis swap. The trade was executed using the 1-year Q/Q HONIA + 10 bps pa vs SOFR at flat. Both floating indices are calculated with daily fixing, compounded three months in arrears, for interest settlement.

NEXT STEPS

• Monitor industry developments and track progress of institutional stakeholders.

BRAZIL (pp.31-32)

MEXICO (p.35)

SOUTH AFRICA (pp.40-41)

ENHANCING CONTRACT ROBUSTNESS (pp.43-47)

• In October 2020 ISDA published the Supplement to the 2006 ISDA Definitions116 to incorporate new fallbacks for derivatives that reference certain key IBORs. Simultaneously, ISDA published an IBOR Fallbacks Protocol that allows market participants to choose to incorporate the revisions into their legacy derivatives trades if they choose to. The FSB published a statement encouraging broad and timely adherence to the ISDA IBOR Fallback Protocol and Supplement.
• In July 2020 Bloomberg began calculating and publishing ISDA Fallbacks. 

ACCOUNTING RULES 

• In September 2019, the International Accounting Standards Board (IASB) finalised its phase 1 amendments to IFRS 9, IAS 39 and IFRS 7, effective 1 January 2020 addressing “prereplacement” issues related to the IBOR reform. These amendments provided relief from potential effects of the uncertainty caused by the IBOR reform, and imposed additional disclosures about hedging relationships directly affected by these uncertainties. In particular, the amendments modified specific hedge accounting requirements, requiring to: disregard potential transition to RFRs in the context of prospectively assessing whether a hedged forecast transaction is “highly probable”, or whether a hedge is expected to remain effective; and assess whether non-contractually specified components of interest rate risk are separately identifiable only at inception of the hedging relationship.
• On 12 March 2020, the US Financial Accounting Standards Board (FASB) issued Update 2020-04 to ease the potential burden to financial reporting related to reference rate reform. This offers relief connected to hedge accounting requirements that will be affected by transition, and also regarding the effects of contract modifications – either those affecting debt instruments, the prospective recognition of which will be allowed, or modifications of other contracts, which will not require subsequent reassessment or re-measurement. An entity may apply the amendments from the beginning of an interim period that includes or is subsequent 50 to 12 March 2020 or after, and entities may apply the amendments prospectively through 31 December 2022.
• On 25 June, the IASB tentatively decided to finalise without substantial changes the proposals related to modifications of financial assets and financial liabilities, changes required to hedging relationships, designation of risk components, classification of financial assets, embedded derivatives and disclosures. Additionally, the IASB tentatively decided to clarify (i) that changes to the hedging relationships have to be made by the end of the reporting period during which a change required by interest rate benchmark reform is made to the hedged risk, hedged item or hedging instrument; and (ii) that such an amendment to the formal designation of a hedging relationship constitutes neither the discontinuation of the hedging relationship nor the designation of a new hedging relationship.
• In August 2020, the IASB finalised its phase 2 work by issuing amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 where the IASB confirmed these decisions. The amendments will be effective for annual periods beginning on or after 1 January 2021, with earlier application permitted.