The IBORs, Interbank Offered Rates, serve as reference rate benchmarks for a wide range of financial products, loans, bonds and derivatives. The most common IBORs are USD LIBOR and EURIBOR on 3 and 6 months tenors.
In order to guarantee the robustness and representativeness of these benchmarks, an international reform begun in 2014, following the recommendations of the FSB (Financial Stability Board). This reform is based on 4 key milestones:
- The reform of the IBORs to guarantee maximum use of real transaction data
- The development of alternative rates (Risk-Free Reference Rates - RFR) to replace the IBORs
- The transition of cash and derivative products from their respective IBORs to alternative RFRs.
- The mitigation of contractual risks associated with the end of the publication of the IBORs.
At the same time, the FSB encouraged relevant stakeholders to start working on identifying options to replace the IBORs and organize the transition.
On the European side, the BMR (Benchmark Regulation), in force since 2016, aims to regulate the functioning of the production, the publication and the use of the reference rate benchmarks. BMR’s objective is to strengthen and improve the governance and control mechanisms in order to avoid the risks of manipulation and guarantee the quality and reliability of the methods applied. It contains provisions to ensure the accuracy, the robustness and the integrity of the reference rate benchmarks and guarantee the reliability of the processes that contribute to their determination. The regulation requires users to have robust fallback provisions indicating the actions to be taken, if a reference rate benchmark ceases to be published or changes significantly.
Note that EURIBOR underwent a reform, while maintaining its characteristics and functioning, and has been recognized as compliant with the Benchmark regulation. However, the introduction of fallback provisions is necessary for users in order to comply with the requirements of the regulation.