Andrea Brischetto, deputy head of domestic markets, RBA
Financial institutions and other entities that have relied on LIBOR and similar interest rate benchmarks for pricing loans and derivatives should already be transitioning to alternative risk-free rates.
This was the main message emerging from a "virtual conference" of Asia Pacific financial regulators and banking technocrats, run by ISDA yesterday.
Underlying the discussion was the recent reiteration by the UK Financial Conduct Authority that firms cannot rely on LIBOR being published after the end of 2021.
"Libor is seen as so vulnerable that its cessation is inevitable," said Rick Sandilands, ISDA's senior counsel in Europe.
He saw few alternatives to transitioning legacy portfolios linked to LIBOR, or local interbank offered rates (IBORs), a view not shared by some of his fellow panel members from Australia.
The RBA will not be advocating a wholesale transition to referencing the risk free rate, which in Australia is the overnight cash rate – otherwise known as AONIA.
"We are pursuing a multi-rate approach because our benchmark, BBSW, remains robust with a lot of work having gone into strengthening the methodology underlying it," said Andrea Brischetto, deputy head of Domestic Markets at the Reserve Bank of Australia.
"Instead, we are expecting market participants to choose a robust reference rate that makes the most sense to their particular product or situation.
"In some cases referencing the risk-free rate or cash rate will make more sense, including for corporate notes and for securities issued by government.
"And just to make clear: this approach does not change the need for LIBOR transition," she asserted.
"Just waiting for the emergence of forward-looking RFRs with similar terms to LIBOR isn't a viable transition strategy."
This last point was amplified by Kerryn Smith, head of conduct, training and governance at NAB's corporate and institutional banking division.
Outlined three broad strategies for dealing with the end of LIBOR.
The first of these is to transfer to an alternative method as soon as possible. "The timing will be crucial, along with the timing of [the new] interest rate publication," he said.
"But for [most] of our corporate borrowers, their day job is making things or providing services –what they are waiting for is certainty."
He suggested that some of his smaller corporate clients will wait until the definition has been published, knowing they have a few months up their sleeves – although that is not necessarily NAB's advice to these clients.
The second strategy Smith outlined can be summed up by the term "contractual fallback", which involves including rules on what to do if the IBOR reference rate ceases before the instrument is retired or otherwise redeemed. New fallbacks for derivatives that reference certain key IBORs will come into effect later this year, reducing the risk of disruption in the event an IBOR ceases to exist.
"Fallbacks ... may cut in a different time or rate than would otherwise occur in the market. This may cause issues with the tax or accounting treatment," Smith said.
"The best way to control the transition is to go early and make customers aware of the consequences of not going early."
The RBA's Andrea Brischetto advised any institutions who are hesitant about adopting fallback exposures at this stage: "don't hesitate".
"Fallbacks are going to play an important role in the smooth transition away from LIBOR for legacy contracts.
"This will significantly reduce the potential risk of transactional disputes litigation contract frustration and ultimately financial market disruptions," she said.
"Given this, The RBA will be requiring floating rate notes that reference BBSW to include the relevant ISDA fallback provisions in order to be to be relevant for collateral in our market operations."
Finally there is the group of "tough legacy approach being considered in New York, London and Europe”.
Rick Sandilands, senior counsel, Europe, said "a tough legacy roughly translates as a trade or a position which doesn't have a fallback.
"In the UK HM Treasury has proposed a rule that would involve LIBOR continuing to be published, but using a different methodology," he said.
Elsewhere, coming to an agreement on risk-free rates for financial products is exerting increasing pressure on major financial players, while financial centres jostle for leading roles as clearing houses, keen for the ticket clipping and highly paid jobs this work brings.
ISDA made the point on its news site yesterday that the EU plans to allow UK firms to continue clearing euro denominated derivatives for 18 months after the Brexit transition period ends, according to an EU draft document. In the absence of such a revision, the UK's current authority to clear euro derivatives for clients in the EU is due to expire on December 31.