Interest rate benchmark reform making progress

Administrators of the world's leading interbank interest rate benchmarks are making progress in reforming their benchmarks and are on track to implement enhanced benchmarks towards the end of next year.

The Financial Stability Board has issued a report on the progress being made by administrators of Libor, Euribor and Tibor since July last year, when it published a blueprint for benchmark reform.

The FSB's blueprint was a response to cases of attempted manipulation of the benchmarks. The G20 gave it the job of making the benchmarks more reliable and transparent, and less easily manipulated.

The FSB's key recommendation was that rates be underpinned by transaction data instead of quotes from market participants.

The FSB said the administrators of Libor, Euribor and Tibor have all taken positive steps, reviewing their benchmark methodologies and definitions, and undertaking sample data collection exercises.

It said administrators of all three major interest reference rates had complied with its recommendation that they work with industry on the changes.

Benchmark administrators from other jurisdictions, including Australia, Canada, Hong Kong, Mexico, Singapore and South Africa have also started to review their benchmark rates, with a view to reform.

The Euribor+ Project, which is being supported by the European Central Bank, involved the development of a methodology using transaction information gathered from more than 60 financial institutions. The methodology was completed last year.

Some of the issues encountered during the project concerned the sufficiency of the data and whether the scope of eligible transactions should be increased, whether there was a need for fallback provisions and for smoothing techniques to deal with the increased volatility of a transaction-based index.

The project also looked at how to make the transition from the current Euribor to the new benchmark as seamless as possible.

The FSB outlined similar developments being undertaken by the administrators of Libor and Tibor.

The FSB said it would review a final progress report on its recommendations in July next year, when it expects administrators to have completed their consultations and to be putting enhancements into effect.