INTEREST RATE BENCHMARK REFORM Bank of Thailand, Bangkok 15 October 2019 Philippe Shah Director of Benchmarks 1 The basics: What is Happening to LIBOR? Concerns of Underlying Scandals, Fines and LIBOR’s end and long term Market IBORs are Regulation replacements Supposed to Benchmark • 2017: FCA announced banks will • Much less interbank lending • Flaws of submission based LIBOR not be compelled to contribute exposed. $9Bn of fines given by to LIBOR post 2021 regulators for exploiting flaws • Many IBORs are not based on any actual market making them very • Working groups set up in major easy to manipulate • Introduction of the IOSCO Principles markets to select alternative Risk for Financial Benchmarks to improve Free Rates (RFRs) to be used • E.g. $200 Bn linked to 3M USD their appropriateness, governance should IBORs cease to exist. and transparency LIBOR but the Fed noted generally less than $0.5Bn of 3M wholesale • Continued reminders by funding actually exists • UK Regulator (FCA) regulates LIBOR, regulators and associations to along with other critical UK users to plan for LIBOR’s benchmarks replacement with RFRs e.g. “Dear CEO” letter from Bank of England • EU Launches Benchmark Regulation (EU BMR) in 2018 2 Timeline of LIBOR related events 2013 to Present Oct 2017 July 2013 SARON Feb 2018 Sept 2018 August 2019 selected as DecDec 2018 IOSCO DecDec 20162016 RFR for CHF, FCA writes to April 2019 Singapore2019 Principles for EMMI states that ECB launches to replace UK bank & ICE implements announces plans Financial TONAR EURIBOR will not consultation into TOIS 2 buyside CEOs waterfall to discontinue Benchmarks selected as meet the EU BMR term structures months later about LIBOR methodology SOR implied created RFR for JPY requirements for €STR plans for LIBOR interest rate benchmark based on LIBOR Dec 2018 JulyJuly 20192019 July 2014 April 2017 Jan 2018 AprilA 2018 July 2018 Sept 2018 EU EURIBOR 2W, 2M, Bank of Japan SONIA selected NY Fed €STR selected as FSB issues Benchmark BOE consults 9W tenors issues consultation as RFR for GBP, launches SOFR, preferred RFR paper to move Regulation on SONIA Discontinued on development of reforms to BOE launches for Eurozone from major (EUBMR) term term interest rate SONIA are reformed SONIA and to replace IBORs to RFRs, structures benchmarks made Starts EONIA working groups created Sept 2018 3 • Banks and Buyside, Corporates • $350 Tn of LIBOR exposure • Risks of Contracts referencing potentially discontinued USERS benchmarks in the future (e.g. IRS referencing LIBOR The basics: post 2021) Who does this impact • Central Banks, Associations, Service Providers, Regulators • Other country IBORs and similar submission based BENCHMARK benchmarks ADMINISTRATORS • Benchmarks directly using LIBOR as an input> THBFIX, ABS SOR, TRYFIX 4 • RFR has no term structure • RFR has no credit risk Principal Differences between IBORs and • RFR is not forward looking Paths to RFRs Interest Rate Reform Issues central banks and administrators need to consider • How to create a robust term interest rate benchmark Question for Most based on actual transactions? Administrators: 5 • Are there sufficient interbank transactions? • Do we look at secured or unsecured transactions? • Should we look at other participants e.g. corporates and buyside? Paths to • Can we deal with substantially different benchmark rates Issues to consider and volatility levels than an IBOR? Interest Rate • Is there any market data that can be used to create a Reform term structure (OIS, Futures)? Issues central banks and administrators need to consider 6 Switch to Risk Free Rates in Major Developed Markets Developments in Interest Rate Benchmarks SOFR and other overnight RFRs are typically Averaging (simple or compounded) smooths the volatile (FSB): references for use in products (3 month averages): W R I T E H E R E W R I T E H E R E W R I T E H E R E Jan to May 2019 GBP 19 Billion of FRNs USD 100 Billion of FRNs Referencing Compound referencing Compound SOFR SONIA > 99 Banks > 21 Banks 7 • Using OIS data (quotes as well and transactions) from a Risk Free Rate + venue and brokers or use futures Term Structure • Applied to existing RFRs (usually central bank Options Chosen administered & calculated) • OIS based options preferred by major developed markets for Interest Rate Benchmark • Waterfall methodology used for submitters • Start with actual interbank transactions, then look at Evolved IBOR Reform similar transactions (e.g. from corporates and buyside), then expert judgement • Similar to ICE LIBOR methodology 8 Approaches to Benchmark Reform Developments in Interest Rate Benchmarks • Risk-free reference rates (RFRs) and approaches now well established in a number of countries: Jurisdiction Existing RFR RFR RFR Administrator Description Official Sector IBOR Announced Approach Federal Reserve Bank of USA USD LIBOR SOFR April 2018 Overnight US Treasury repo (new) Full migration to RFR New York UK GBP LIBOR SONIA April 2018 Bank of England Overnight unsecured deposit (enhanced) Full migration to RFR Eurozone EURIBOR €STR October 2019 ECB Overnight unsecured deposit (new) Dual curve approach Switzerland CHF LIBOR SARON October 2017 SIX Swiss Exchange Overnight repo transactions (existing) Full migration to RFR Japan TIBOR TONA December 2016 Bank of Japan Overnight unsecured call rate (existing) Dual curve approach Cash Rate Australia BBSW 2017 Reserve Bank of Australia Overnight unsecured fund (existing) Dual curve approach (AONIA) Enhanced Canada CDOR November 2018 Bank of Canada Overnight repo transactions (enhanced) Dual curve approach CORRA Monetary Authority of Singapore SIBOR SORA (tbc) August 2019 Overnight unsecured transactions Dual curve approach Singapore Treasury Markets Hong Kong HIBOR HONIA April 2019 Overnight unsecured transactions Dual curve approach Association Example of Developments in Asia Different Strategies for Countries with No OIS Market: Dual Curve Approach Fits Singapore • Testing and looking to implement Enhanced SIBOR (SIBOR+) in 2020 Hong Kong • Similar waterfall methodology for submitters as ICE LIBOR • In addition to existing interbank transactions, submitters consider • Minor enhancements to HIBOR and retain corporate and buyside deposits before resorting to expert judgement • More robust HONIA, plans to calculate directly from transactions • Use both for cash + derivative markets • SIBOR (submission based) • SOR (Implied Swap Offer Rate) • SORA (O/N Interbank Deposit Average) Present Indonesia • Bank Indonesia Launched INDONIA in August 2018 to replace • SIBOR+ for cash markets, loans etc O/N JIBOR tenor and potentially replace it in the long term • SOR derivative users move to compounded SORA Medium Term • SIBOR+ for cash markets • Term SORA once sufficient SORA based derivatives Long available Term 10 Refinitiv Interest Rate Benchmarks Refinitiv is the Largest Term Structure Risk Free Rate Provider of Interest Rate Benchmarks globally Initiatives Initiatives • Administrator of CDOR and CORRA • Plan to launch term structures to be • Creation of new RFRs primarily in (Canada), SAIBOR (Saudi Arabia), TRYFIX added to central bank RFRs developing countries (Turkey) and VNIBOR (Vietnam) • Based on Tradeweb and broker OIS • Operational enhancements to • Calculating agent for over 30 major data existing RFRs interest rate benchmarks including • Focus on GBP, USD, JPY, CAD. • Use deposit transaction data from THBFIX, SIBOR (Singapore), SOR • Can be used to replace USD/GBP/JPY Refinitiv FXT or from post trade (Singapore), CNH HIBOR (Hong Kong), LIBOR; TIBOR and CDOR term services for voice brokered trades HONIA (Hong Kong), MOSPRIME exposures (Russia), KLIBOR (Malaysia), TAIBOR (Taiwan), EIBOR (UAE) • Can also be used to replace USD LIBOR in other implied interest rate benchmarks which use forward looking cash flows 11 Thank you. 12.