Understanding the New Interest Rate Benchmark Regime — Part III

Meet the new floating rate benchmarks

A few key benchmarks which are identified as alternatives to the existing IBOR benchmarks are enlisted below:

Characteristics observed for the new overnight rates

a. Higher volume of traded rates:

Moving towards the “two-benchmark” approach:

Most jurisdictions globally are contemplating towards using a two-benchmark approach. This will involve using the new benchmark rates, at the same time continue to use the existing IBORs albeit with a few modifications. Thus, there would be two sets of rates that would co-exist at any point in time. For example, in the Eurozone, the reformed EURIBOR would co-exist with ESTER. A lot of research is being carried out by the industry as well as academia in order to arrive at a methodology for computing the reformed term benchmark rates. The aforesaid methodology is still a work in progress and the industry participants are trying to arrive at the most appropriate methodology that could be adopted by the market in the future.

Multiple benchmarks: a boon or a bane?!

Different approaches to devise methodologies to be applied to calculate the reformed credit sensitive benchmark is expected to bring market segmentation. Also, too many reference rates would swarm the market. Whereas, some market participants may be able to tackle such issues, other less savvy market participants may find it difficult to adjust to the new framework at least in the near to medium term.

What about the economies whose local benchmarks depend on existing IBORs?

There are many economies which are dependent on existing IBORs and FX-swaps market. For instance, in India, the MIFOR curve is widely used as a reference rate for swaps contracts. MIFOR is derived from USD LIBOR with an adjustment of premium points derived from the FX market. With the existing IBORs getting reformed, these will directly impact such local benchmark rates. Market participants are trying to gauge the degree of this impact and also formulate possible solutions to address such impending issues.

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