• Market liquidity, depth, and data sufficiency vary greatly by currency. In some
currencies and tenors there may be sufficient transactions to support a purely
transactions-based measure of IBOR+ if desired. In other currencies and tenors this is
unlikely to be the case. Alternative approaches, for example that take into account
judgement and quotes as well as transactions are favoured by some members. The
OSSG is exploring the implications of heterogeneity across currencies and tenors.
Different jurisdictions are collecting transactions-level data for bank borrowing, at
least in part to examine the feasibility of constructing alternative reference rates.
• The range of potential risk-free rates that might be used as an alternative reference
rate varies by currency. In some markets OIS rates are preferred by the official
sector, but in other markets, such as U.S. dollar markets, the official sector has a
number of concerns in regard to the current structure of OIS markets, or, in the case
of the euro, on the currently prevailing design methodology for a new OIS reference
rate. Some markets could make use of Treasury bill rates, such as the U.S. dollar and
Japanese yen, but in other markets, this would likely prove impossible, such as in the
euro. It is also possible that the range of available tenors may differ across
currencies; in some currencies it may be sufficient for investors’ purposes to have
only a risk-free overnight reference rate, while term risk-free reference rates may be
desired in others. OSSG members are continuing to explore a range of options within
each currency, taking into account market liquidity and susceptibility to
manipulation.
• Members have different statutory authorities and legal powers in relation to interest
rate benchmarks. For example, the UK FCA has regulatory powers to enforce bank
participation in LIBOR, while in Japan, the regulatory framework for financial
benchmarks was enacted and will be enforced within a year, and relevant legal
instruments have been proposed for legislation in the EU. Members are continuing to
review the case for public sector intervention and in what form. Initial discussions
have revealed a range of views. Although all members support promoting
compliance of benchmarks with the IOSCO Principles, some members consider that
it is much harder to justify intervention beyond that and favour market choice among
IOSCO-compliant benchmarks. Other members, particularly the U.S. dollar currency
group, note the possibility of coordination failures in the private sector, for example
collective action problems in derivative markets preventing participants moving to a
better (risk-free) benchmark, and the Federal Reserve has indicated a stronger
willingness to intervene to facilitate a solution. Members agree that it would be
useful to spell out clearly the various arguments for policy intervention but allow for
different approaches across currencies given the differing political and economic
constraints faced in various jurisdictions.
Although the FSB supports the concept of the multiple-rate approach, it also recognizes that it
is not without some costs. Market liquidity is improved when the use of benchmarks is highly
concentrated and overall market liquidity may decline if the market is fragmented across
multiple reference rates. The impact of this type of fragmentation could be greater in
jurisdictions where markets are smaller in overall size. Benefits from the current system of a
single dominant benchmark include lower frictional hedging risks and costs, risk transfer
synergies amongst a wide range of markets, simpler back office operations, valuation