Reference rates undergoing change
Stibor is an interbank rate used as a reference rate for many financial contracts. In 2013, the Swedish Bankers' Association took on the role of principal and was given overall responsibility for Stibor under the framework that took effect on 4 March 2013. The Stibor framework describes inter alia the method used for setting Stibor. Over the years, the framework has been developed and modified to comply with ESMA principles1).
In October 2018, the EU Commission published its decision under the Benchmark Regulation, declaring Stibor to be a so-called critical benchmark in Sweden. Thus Stibor is listed in the EU Commission's register of critical benchmarks. Among other things, the regulations place extensive demands on monitoring, supervision, documentation and transparency on the part of the administrators of the interest rate.
To adapt Stibor to the Benchmark Regulation, the Swedish Bankers’ Association formed a wholly-owned subsidiary – Financial Benchmarks Sweden AB (FBS) – which took over the Bankers’ Association's Stibor operations as of 1 January 2019.
The Benchmark Regulation's (BMR) transitional regulations mean that existing administrators, including those of Financial Benchmarks Sweden AB, have until the end of 2019 to apply for authorisation from the relevant supervisory authority to continue their operations.
Financial Benchmarks Sweden AB will ensure that an application for authorisation is submitted to the Swedish Financial Supervisory Authority during the latter part of 2019. Considerable work is currently in progress to meet the requirements for authorization by then. Stibor has hitherto been published free of charge since its introduction at the end of the 1980s. Administration and maintenance costs for Stibor operations will increase due to the Benchmark Regulation and the adjustments it requires. It is therefore likely that license fees will be charged for the ability to receive Stibor in real time. Stibor will continue to be available free of charge, but by delayed, open publication.
Alternative reference rates
Development of so-called alternative reference rates is in progress in parallel to the adaptation of interbank rates to the Benchmark Regulation.
One of the reasons behind the creation of alternative reference rates is that the number of unsecured interbank transactions has fallen. Banks no longer have the same need of interbank loans, as central banks provide the market with liquidity.
This has led to consequences for Libor, the British Interbank rate (London Interbank Offered Rate). The FCA, the British supervisory authority, has announced it will no longer exercise supervision over Libor as of 2021, since Libor does not reflect actual interbank transactions.
The FCA is currently working actively to get banks to use alternative reference rates instead of Libor. Working groups have been formed in the USA, Japan and Switzerland, where Libor is also published as a reference rate, for the purpose of developing alternatives to the existing interbank rates.
The Benchmark Regulation requirement for one or more alternative benchmarks as so-called ibor (interbank offered rate) fall-backs is another reason for the current creation of alternative reference rates.
The trend toward weaker interbank rates is also consistent with the Financial Stability Board's position on the need to improve reference rates in the major currency areas.2) The problem under discussion is how Libor and Eonia contracts should be managed when and if these reference rates no longer work.
In Sweden, there is no requirement to replace Stibor with another interest rate. Nor are there any plans to phase out Stibor, as it is a robust, reliable reference rate in which the market has great confidence. But in order to comply with Benchmark Regulation requirements for an alternative reference rate and to be ready and able in the future to replace Stibor with a different reference rate in contracts, Sweden is also reviewing the ability to create a supplement or alternative to Stibor.
Accordingly, the Swedish Bankers' Association, in the same way as other countries, has formed a working group whose purpose is to study and develop supplements and alternatives to Stibor. The goal is to create a risk-free reference interest rate for the short term based on completed transactions. This is consistent with alternative reference rates created in places such as the United Kingdom (Sonia), USA (Sofr) and Euroland (Ester).
The working group comprises the banks that today calculate Stibor. The Swedish Central Bank, National Debt Office and Financial Supervisory Authority are observers in the working group. Work has begun on the initiative of the Swedish Bankers’ Association, which also leads the working group. The working group intends to submit a recommendation regarding supplements and/or alternatives to Stibor during the latter part of 2019.
While work is in progress, the working group intends to communicate its results and proposals to financial market operators by means of round table discussions and open consultations. Minutes from the working group’s meetings are published on the Swedish Bankers’ Association website
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1) ESMA-EBA Principles for Benchmark-Setting Processes in the EU