Welcome to KPMG’s fourth issue of our monthly LIBOR newsletter in which we provide updates on LIBOR and other benchmark interest rate developments that directly impact banks and consider the potential implications of the related regulatory requirements.
1. HKMA Deputy Chief Executive speaks on benchmark regulation and migration
Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), spoke on recent developments on the LIBOR transition, as well as the benchmark reform in Hong Kong, at the Bloomberg-ISDA Benchmark Conference. Mr. Lee encouraged global banks to take the lead in the transition to alternative reference rates while smaller banks should not wait and see. Mr. Lee also urged banks to begin client outreach and educate their clients about the benchmark transition early. In addition, he encouraged market participants to start exploring how to incorporate HONIA (HKD Overnight Index Average) into their businesses.
30 May 2019 HKMA
2. FSB publishes user guide for overnight risk-free rates
The Financial Stability Board (FSB) published a user guide for overnight risk-free rates (RFRs). The guide provides an overview of RFRs, details of calculations, and options on how overnight RFRs can be used in cash products. The FSB aims to encourage adoption of these RFRs where appropriate.
4 June 2019 FSB
3. Bank of England Deputy Governor discusses progress for LIBOR transition
In the conference jointly held by the Bank of England, Financial Conduct Authority, and the Working Group on Sterling Risk Free Reference Rates, Deputy Governor for Markets & Banking Dave Ramsden discussed the preparations made by financial firms for the transition from LIBOR. He set out what has been done and what is still left to do on the transition journey. He also reflected on the progress market participants made in terms of adopting risk-free rate alternatives such as SONIA.
5 June 2019 Bank of England
4. FCA releases feedback on the Dear CEO letter on LIBOR transition
The Financial Conduct Authority (FCA) published key observations on the responses from major banks and insurers in the UK to the Dear CEO letters published in September 2018 which asked for details of the preparations and actions being taken by those firms to manage transition from LIBOR to alternative interest rate benchmarks. The observations cover 8 key areas: (i) comprehensive identification of reliance on and use of LIBOR; (ii) quantification of LIBOR exposure; (iii) granularity of transition plans and their governance; (iv) identification and management of prudential risks associated with the transition; (v) identification and management of conduct risks associated with the transition (vi) scenario planning; (vii) role of market participants in supporting transition; and (viii) transacting using new risk free rates and building in fallbacks.
5 June 2019 FCA
5. FASB moves towards approving accounting relief for contract modifications arising from reference rate reform
The Financial Accounting Standards Board (FASB) took a major step towards approving accounting relief for companies and organizations required to modify contracts as a result of new reference rates. A tentative decision was made for contracts that meet certain criteria, where a change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. The decision applies to loans, debt, leases, and other arrangements.
19 June 2019 FASB
1. ARRC roundtable on 3 June 2019
The Alternative Reference Rates Committee (ARRC) and NYU Stern School of Business co-hosted a roundtable forum on 3 June 2019. The forum featured remarks and presentations by Vice Chair for Supervision Randal K. Quarles, ARRC Chair Tom Wipf and Federal Reserve Board of Governors David Bowman. There were also panel discussions about how market participants could use SOFR in cash products, ARRC's recommended fallback language and steps that some firms are taking to transition away from LIBOR.
3 June 2019 ARRC
2. ISDA responds to IASB on benchmark reform
The International Swaps and Derivatives Association (ISDA) responded to the International Accounting Standards Board’s (IASB) exposure draft on interest rate benchmark reform (ED/2019/1). ISDA welcomed the steps taken by the IASB to amend International Financial Reporting Standards (IFRS) in response to the challenges posed by the IBOR reform in relation to ‘phase-one’, or the uncertainty caused by the IFRS’s hedge accounting forward-looking rules. ISDA also pointed out that the IASB should accelerate the work to address the next phase of issues arising from IBOR reform.
17 June 2019 ISDA
3. ARRC releases preliminary report on potential interdealer cross-currency swap market conventions
The Alternative Reference Rates Committee (ARRC) released a report detailing preliminary considerations for the use of risk-free rates (RFRs) in interdealer cross-currency swaps. The report outlines potential conventions for interdealer trading of RFR-RFR and RFR-IBOR cross-currency swaps. The ARRC’s Cross-Currency Swaps Subgroup is working with industry trade associations to receive wider feedback from market participants on the market conventions and other aspects described in the report.
24 June 2019 ARRC
Partner, Head of Financial
Financial Risk Management
Partner, Financial Risk Management
Financial Risk Management