Benchmark rates, including in SA. get reformed & renamed

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A couple of years ago, on Creative Concern’s website, Klaus Schwab stated that “the trends that are shaping the 21st century embody both promise and peril”. Today, most focus seems to be on the peril, and daily academic research headlines confirm this.

On the promise side there have been positive strides globally to reform reference interest rates that represent benchmarks.

These benchmarks are broadly defined as “any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees”.

The reform also commenced with peril when it was disclosed that the London interbank offered rate (Libor) was being manipulated, as explained in David Enrich’s The Spider Network and Liam Vaughan and Gavin Finch’s The Fix. Also, the report by the Fixed Income Clearing Corporation’s markets standards board in 2018, which covered 225 years and identified 25 specific patterns of financial misconduct, of which the manipulation of reference prices (such as benchmarks) is one.

In contrast, some believe the manipulation is what made Libor successful and that manipulation is Libor’s magic!

The reform has been global. The US transitions from US Libor to secured overnight funding rate (SOFR), an overnight rate currently referencing over $1-trillion of US treasury repo transactions. The euro area introduced the European short-term rate (ESTR) in October 2019 to reference and prevent illiquid derivative markets.

An ongoing reform progress is guiding the transition to sterling overnight index average (Sonia) in the UK. Japan follows the multiple rate approach, away from JPY Libor to Tokyo interbank offered rate (Tibor) and its RFR Tokyo overnight average rate (Tona).

In SA, the publication of three consultation papers by the SA Reserve Bank and market practitioner groups form the basis of the reform. The consultation, feedback, and methodology papers in 2018, 2019 and 2020, respectively, have enticed comments. The papers offered 10 key recommendations for public response.

We conducted survey research to ascertain the level of buy-in on the key recommendations published in the consultation and feedback. Generally, respondents believed the reform to be crucial.

However, opinions differ, and the survey was an attempt to lift the veil on ...
9 Aug 2020 1AM English South Africa Business News · News

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