Market Needs to Do More to Prepare for End of LIBOR – ASIC, RBA

Participants need to be clear that the LIBOR will end after 2021 and prepare to deal with the challenges this presents, Australian regulators said at the ISDA Annual Australia Conference.

Australian regulators have asked market participants to do more to plan for the end of LIBOR in 2021.

Speaking at the ISDA Annual Australia Conference in Sydney on Tuesday (23 October), ASIC (Australia Securities and Investment Commission) chair Cathie Armour said that UK FCA (Financial Conduct Authority) chief Andrew Bailey’s statement that LIBOR will cease to exist after 2021 was extremely clear and unequivocal.

“Market participants should be under no misconceptions that LIBOR will continue to exist after this. While ASIC is confident that the work done to ensure the resilience of BBSW will ensure BBSW remains a key benchmark in the years ahead, Australian market participants have significant reliance on LIBOR and should be planning for a post-LIBOR world,” she said. “It is vital that Australian market participant begin preparing for the end of LIBOR, and ensure their voices are heard in the development of alternative risk-free rates.”

Also speaking at the conference, RBA (Reserve Bank of Australia) deputy governor Guy Debelle said that he was concerned about the lack of urgency at banks and brokers in preparing for impending phasing out of the controversial rate.

“A lot of people thought someone will just fix this when we get there, and that someone is going to come up with a solution. But people are coming to terms with the realisation that this is not going to happen,” he said.

Debelle further clarified that that the phasing out of LIBOR has nothing to do with the wishes of global regulators. In fact, the removal of the UK legislation compelling banks to submit for LIBOR calculation means that institutions will stop submitting. So even if LIBOR were to continue, there are no viable bank transactions underlying the rate, he said.

Globally, some USD 370 trillion of financial products reference LIBOR, including USD 300 trillion representing OTC and exchange-traded derivatives. US dollar LIBOR represents about 80 percent of this amount. Debelle added that AUD 5 trillion (USD 3.55 trillion) in products reference LIBOR, making it even more important that there is a plan on what Australian banks will do once the rate ceases to exist.

ASIC released a comprehensive regulatory regime for financial benchmarks in June this year after corresponding legislation was passed by the parliament. The regime was aimed at ensuring that “critical” benchmarks will be subject to international standards of oversight and made manipulation of any financial benchmarks or products used to determine these benchmarks subject to civil and criminal penalties.

In May, ASIC released a new BBSW calculation methodology indicating the benchmark would be calculated directly from market transactions during a longer rate-setting window involving a larger number of participants.

“We have a reasonable degree of comfort around the robustness of BBSW in stark contrast to LIBOR. We are confident that the BBSW has no expiry date,” RBA’s Debelle said.

ASIC’s Armour said that since May, an average of 88 percent of bank bill transaction volumes were executed within the rate set window. “This has meant that BBSW can be formed using VWAP 93% of the time in 6-month tenor, and 78% of the time in 3-month tenor. This has helped ensure the market’s trust in the robustness and reliability of BBSW,” she said.

However, Armour noted, that the frequency of VWAP (volume weighted average price) formation in other BBSW tenors has been less, and so market participants should “carefully consider” whether derivatives and other transactions referencing BBSW are being benchmarked against the most liquid tenors.

While BBSW will remain a credit rate, once LIBOR is replaced by a risk-free rate, it will cause challenges for cross-currency swaps that reference both rates. Debelle said that this “interesting” challenge will require banks to work out how they will handle having a credit and risk free rate on opposite sides of a product.

He further said that the market needs to develop a term structure around the current risk free rate in Australia.

“The RBA’s cash rate is an overnight rate, so we have no term cash rate. It is odd that state governments and debt authorities issue debt referencing the BBSW – essentially risk-free entities are referencing a credit rate rather than the risk free rate. It would be useful to reference a term structure, but the market has to solve this problem,” he said.

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