Regulators need to provide clarity on Libor cessation, says ISDA
The International Swaps and Derivatives Association (ISDA) has written to regulators stating that the industry requires greater clarity before attempting to create a consensus on how to deal with the London Interbank Offered Rate (Libor) transition.
A transition away from Libor – which has been tarnished by rigging scandals – remains one of the largest challenges facing the industry.
The Financial Stability Board’s (FSB) Official Sector Steering Group (OSSG) coordinates international efforts on benchmark reform and the transition from Libor.
In July 2016, the OSSG asked the International Swaps and Derivatives Association (ISDA) to lead work to enhance the robustness of derivatives contracts referencing widely-used benchmarks like Libor.
In March 2019, the FSB OSSG requested ISDA conduct a further consultation on pre-cessation issues. That consultation launched in May 2019, seeking comment on how derivatives contracts should address the news that Libor or certain other interbank operating rates (Ibors) are no longer representative of an underlying market.
In the ISDA letter, written to Financial Conduct Authority (FCA) chief executive Andrew Bailey and Federal Reserve of New York president John Williams, the association outlines how the industry wants assurance that an unrepresentative Libor would only be published for months, rather than years.
“ISDA remains fully focused on the timely delivery of a fallback solution to prevent the systemic disruption that could occur if Libor or another key Ibor ceases,” the letter reads. “As we finalise the work on permanent cessation fallbacks, we will simultaneously work with regulators and the industry to increase market understanding of the implications of a ‘non-representative’ Libor”.
The association also says that it is seeking confirmation from clearing houses that is Libor does become unrepresentative, they will change their entire portfolio of cleared derivatives to reference a safer rate.
“Further clarity on these issues should greatly assist market participants in understanding the implications of a ‘non-representative’ Libor,” adds ISDA.
The association adds that it would need to finalise its work on permanent cessation fallbacks. It expects to finalise the substantive portion of the work on permanent cessation fallbacks by the end of 2019, with implementation during the first half of 2020.