The $370 Trillion Benchmark Challenge

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

The transition from interbank offered rates, or IBORs, to new alternative risk-free rates (RFRs) has been likened to the move to a single currency in Europe.

To help market participants and others understand and address the many complex issues relating to this change, ISDA and other trade associations (AFME, ICMA, SIFMA and SIFMA AMG) have published a benchmark transition roadmap. This roadmap aggregates and summarizes the work conducted so far to select alternative risk-free rates (RFRs). It also sets out a number of potential challenges that firms might have to address as they transition to RFRs. The roadmap reflects over two years of work by public-/private-sector working groups to identify RFRs and plan for transition for each rate and by jurisdiction. If you aren’t familiar with this planning, or the challenges facing market participants, then you need to read this document.

So, what are the issues?

There are many. The sheer scale of IBOR exposures, for example – total outstanding notional exposure is estimated at over $370 trillion, spread over derivatives, bonds, loans and other instruments. Liquidity is another issue – more specifically, the need to establish derivatives markets in the new RFRs. Valuation complexities could emerge, such as those arising from the fact that RFRs do not include bank credit risk, which complicates the transition of legacy contracts that reference IBORs. Infrastructure issues also need to be addressed – for example, those relating to data, systems and operational procedures, trading and clearing.

The roadmap is just the first part of a comprehensive effort by ISDA and the other trade associations related to interest rate benchmark transitions. The associations will also initiate a global survey of buy- and sell-side participants and infrastructures later this month to delve into how firms use the IBORs, the extent of their readiness to transition across products, the challenges they expect to encounter, and the possible solutions they’re considering. The responses will feed into an in-depth report aimed at supporting industry interest rate benchmark transition planning efforts.

This survey will be a critical part of the outreach effort, and will complement and inform transition work being conducted by the public-/private-sector RFR working groups. It will help ensure all the important issues are identified and explored across diverse sectors of the market, helping to enable an orderly transition.

If you’re involved in benchmark transition work, we will need you to participate in our survey to identify issues and join in developing solutions. By working together, we can help ensure a successful transition, which will result in a safer and more efficient global financial market.

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