Final Reflections on the LIBOR Transition

The FSB initiated the OSSG in 2013 to ensure a smooth transition away from LIBOR, and after a decade of preparation, the LIBOR transition is now in its final stage. As of June 2023, the remaining USD LIBOR panel has ended, with only three US dollar LIBOR settings continuing in synthetic form until end-September 2024. Reforms for other interest rate benchmarks and transition efforts are also nearing their completion.
This transition has been a monumental undertaking, requiring collaboration between regulators, industry bodies, and market participants to achieve a more stable financial system. The FSB emphasizes the importance of using robust and sustainable benchmarks, such as risk-free or nearly risk-free rates, going forward to maintain financial stability.
The FSB provides several key messages for the post-transition landscape:
Market participants are encouraged to choose reference rates that are robust, suitable, sustainable, and compliant with relevant guidance and regulation. The use of robust reference rates anchored in deep, credible, and liquid markets is advised to avoid the need for future transitions.
The FSB recognizes the potential role of RFR derived term rates under certain circumstances but warns against over-reliance on term rates, as it may undermine their robustness due to underlying market illiquidity. Usage of term rates must align with official sector and national working group best practices to ensure reference rates‘ stability.
Attempts to recreate rates based on LIBOR’s underlying wholesale unsecured markets carry inherent vulnerabilities and pose financial stability concerns. The use of CSRs risks undermining the progress made during the LIBOR transition. IOSCO has reviewed certain CSRs, raising concerns about their reliability and transparency.
Market participants are advised to incorporate robust contractual fallbacks to account for the permanent cessation of panel-based LIBOR or its loss of representativeness. Standard form contracts should include explicit fallback rate mechanisms, as demonstrated by ISDA’s leadership in improving fallback language.
The FSB acknowledges jurisdictions with laws and regulations obliging market participants to include suitable fallback provisions in contracts, but it encourages all market participants to adopt robust fallback mechanisms in all cases.
The FSB expresses gratitude to OSSG co-chairs and members for their dedication to improving financial stability. Ongoing monitoring of the reference rate environment, including Term RFRs and CSRs, will continue with insights from IOSCO.