Welcome to KPMG’s latest 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.

Regulatory Updates

1. BOJ consults on the appropriate choice and usage of Japanese Yen benchmarks

The Bank of Japan (BOJ) launched its public consultation on the appropriate choice and usage of Japanese Yen Benchmarks. The consultation paper outlines the outcome of the past deliberations in the BOJ Committee and seeks comments on the future structure of JPY interest rate benchmarks. In particular, the paper discusses alternative benchmark options which are term risk free rates based upon the uncollateralised overnight call rate (TONAR) and Tokyo Interbank Offered Rate (TIBOR).

2 July 2019 BOJ 


2. ECB writes to European authorities on IBOR transition and EMIR grandfathering

The European Central Bank (ECB) wrote to the European Commission and the European Securities and Markets Authority (ESMA) regarding the implications of contract amendments with respect to the use of interest rates on margin requirements under European Market Infrastructure Regulation (EMIR).

2 July 2019 ECB 


3. ECB writes to significant institutions on preparation for interest rate benchmark reforms

The ECB wrote to the CEOs of significant institutions operating in the euro area to seek assurance that their senior managers and Boards understand the risks associated with interest rate benchmark reforms and are taking appropriate action to ensure smooth transition to alternative or reformed benchmark rates ahead of the deadline set by the EU. The ECB also required these banks to provide a Board-approved summary of their risk assessment, a detailed action plan in relation to the benchmark reform, and a completed questionnaire to facilitate the ECB’s assessment. 

3 July 2019 ECB / KPMG publication


4. Bank of England welcomes EIOPA to prioritise the monitoring of LIBOR transition

The Working Group on Sterling Risk-Free Reference Rates of the Bank of England wrote to the European Insurance and Occupational Pensions Authority (EIOPA) to welcome its decision to add the monitoring of LIBOR transition to their 2019 priorities. The Working Group encouraged EIOPA to actively remove the recognised Solvency II barriers to transition and would welcome EIOPA’s consideration of a pan-European taskforce to address regulatory barriers to LIBOR transition.

9 July 2019 Bank of England


5. ECB calls to benchmark administrators for expressions of interest in producing a €STR-based forward-looking term structure

The ECB’s Working Group on Euro Risk-free Rates is in the process of preparing a market adoption plan to ensure a smooth transition from EONIA to €STR. As part of the transition effort, the Working Group is calling for potential benchmark administrators with a view to ensure the robust administration of €STR-based term structures.

10 July 2019 ECB


6. Bank of England reports on the progress of the transition away from LIBOR

In the latest Financial Stability Report and Record, the Bank of England reported on progress in relation to LIBOR transition. The report suggests that, despite the progress in establishing risk free rate-linked products and building liquidity in these new markets, many new contracts maturing beyond 2021 continue to reference LIBOR. The Bank of England reminds that there is no justification for firms continuing to increase their exposures to LIBOR and the pace of market participants’ transition efforts needs to accelerate.

11 July 2019 Bank of England 


7. SEC Staff publishes statement highlighting risks for market participant consideration on LIBOR transition

The staff of the Securities and Exchange Commission (SEC) published a statement that encourages market participants to proactively manage their transition away from LIBOR and outlines several potential areas that may warrant increased attention. The statement encouraged market participants to identify existing contracts that extend past 2021 to determine their exposure to LIBOR and to consider whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language. The statement also contains guidance for how registrants might respond to risks associated with the discontinuation of LIBOR.

12 July 2019 SEC 


8. ECB issues recommendations on the EONIA to €STR legal action plan

The ECB’s Working Group on Euro Risk-free Rates issued recommendations on the EONIA to €STR legal action plan for ensuring a smooth transition from EONIA to €STR for both new and legacy contracts referencing EONIA. The application of the recommendations in the EONIA to €STR legal action plan is voluntary and market participants are encouraged to make their own independent decision about the adoption of any suggested recommendations.

16 July 2019 ECB

Industry Update

1. ARRC releases guiding principles and scope of work for its Consumer Products Working Group

The Alternative Reference Rates Committee (ARRC) released guiding principles for the development of fallback contract language for consumer products and defined the scope of work for its Consumer Products Working Group. This working group, whose stakeholders include retail customers, will facilitate a robust market-wide consultation process to solicit feedback on any proposed recommendations.

11 July 2019 ARRC 


2. ARRC releases white paper on using an average of SOFR to build an adjustable-rate mortgage product for consumers

The ARRC released a white paper regarding the use of an average of the Secured Overnight Financing Rate (SOFR) in newly issued adjustable-rate mortgages (ARMs). The white paper demonstrated that basing an ARM loan on an average of SOFR can provide consumers with a stable rate that would be consistent with other competitive rates on existing loan products. The SOFR-indexed ARM concept would provide consumers with certainty when payments reset by referencing an average of SOFR calculated prior to the reset date.

11 July 2019 ARRC 


3. ARRC releases consultation on fallback contract language for new closed-end, residential adjustable-rate mortgages for public feedback

The ARRC released a consultation on U.S. dollar (USD) LIBOR fallback contract language for new residential adjustable-rate mortgages (ARMs). The consultation proposes improved fallback language for new ARM contracts that reference USD LIBOR to mitigate the risks associated with the potential end or disruption of LIBOR after 2021. LIBOR is currently the most commonly used reference rate for consumer ARMs.

12 July 2019 ARRC 


4. SIFMA publishes insights on LIBOR transition

The Securities Industry and Financial Markets Association (SIFMA) issued a publication to provide a general overview of the LIBOR transition, with a focus on the Secured Overnight Financing Rate (SOFR).

15 July 2019 SIFMA 


5. ISDA releases Interest Rate Benchmarks Review

The International Swaps and Derivatives Association (ISDA) issued the Interest Rate Benchmarks Review for the second quarter of 2019 and the first half of 2019. The report analysed the trading volumes of interest rate derivatives (IRD) transactions in the United States referencing the Secured Overnight Financing Rate (SOFR) and other selected alternative risk-free rates (RFRs). The report found that IRD notionals referencing SOFR increased more than two and a half times to $84.7 billion in the second quarter of 2019 from $22.6 billion in the first quarter, whereas IRD notionals referencing alternative RFRs totalled $1.8 trillion, almost unchanged from the first quarter of 2019.

22 July 2019 ISDA 


6. ISDA publishes preliminary results of supplemental benchmark fallbacks consultation

ISDA published a statement summarising the preliminary results of a supplemental consultation on adjustments that would apply to fallback rates in the event certain interbank offered rates (IBORs) are permanently discontinued. Subject to the ultimate decision of the ISDA Board Benchmark Committee, ISDA expects to proceed with developing fallbacks for inclusion in its standard definitions based on the “compounded setting in arrears rate” and the “historical mean/median approach” to the spread adjustment for USD LIBOR, CDOR, and HIBOR. ISDA hopes to publish additional information in August.

30 July 2019 ISDA 

Contact Us

Simon Topping
Regulatory Advisory
KPMG China
Tom Jenkins
Partner, Head of Financial
Risk Management
KPMG China
Michael Monteforte
Financial Risk Management
KPMG China
Marie Gervacio
Partner, Financial Risk Management
KPMG China
Edwin Hui
IT Advisory
KPMG China
Desmond Yu
Associate Director,
Financial Risk Management
KPMG China