IOSCO says early transition to risk free rates will help to mitigate potential financial stability and conduct risks associated with the transition away from LIBOR.
IOSCO (the International Organization of Securities Commissions) has issued a statement urging market participants to transition to RFRs (risk free rates) early to mitigate potential risks arising from the expected cessation of LIBOR.
The statement is aimed at raising awareness which IOSCO says is important to facilitate prudent risk management across corporate and financial institutions and mitigate potential financial stability and conduct risks associated with the transition away from LIBOR.
While aimed primarily at market participants with significant exposure to financial instruments and other arrangements that reference USD LIBOR, the statement is also relevant to participants that reference other benchmarks which may use USD LIBOR as an input for its calculation.
“Given the widespread use of the USD currency in markets (directly or indirectly), USD LIBOR has become the most used interest rate benchmark globally, both in sophisticated financial instruments and retail financial products,” IOSCO says.
As of end-2016, the total gross notional exposure to USD LIBOR was close to an estimated USD 200 trillion, roughly 10 times US GDP.
The statement, available here, sets out a number of matters for USD LIBOR users to consider, including RFRs, infrastructure, conventions, fallbacks, term rates, regulatory dependencies, communication and international engagement.
RFRs provide a robust alternative and can be used in the majority of products, IOSCO says, adding that the inclusion of robust fallbacks should be considered a priority in both new and existing contacts.
“The best risk mitigation to a LIBOR cessation event is moving to RFRs now.”