Reforms up with Libor phaseout

By Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) and other affected central banks in the region will have to come up with alternative reference rates (ARRs) and risk-free rates (RFRs) with the discontinuation of the Libor (London inter-bank offered rate) in two years, and ensure markets are aware of benchmark reforms otherwise it could cause systemic risk in the region, a study by the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) said.

The study covered the 11 central banks of EMEAP and the implications of financial benchmark reforms after the Libor is phased out by 2021, as well as the implementation of EU Benchmarks Regulation (BMR) on EMEAP countries.

In the Philippines, the financial benchmark reforms will affect the BSP’s PHIREF, BVAL Reference Rates, and the US dollar/Philippine peso fix by the Bankers Association of the Philippines. But based on the report, the BSP will retain local benchmarks. The central bank however did not identify an ARR.

But, the EMEAP noted actions already taken by the BSP in dealing with benchmark reforms such as in issuing guidelines on marking-to-market financial instruments and “providing basis for establishment of reliable and market-based benchmarks.”

Basically, the report said there is a need to raise awareness of the financial benchmark reforms among market participants and in doing this, it presented risk scenarios for the Libor discontinuation, the EU BMR and the plan to adopt multiple-rate approach.

The report said markets appear not prepared for the transition from Libor to ARRs. “Overall risk is recognized to some extent, but more detailed information on financial exposures is necessary to complete the overall risk assessment.
Libor discontinuation may be more problematic for corporate bonds, syndicated loans and other cash products than derivatives.”

EMEAP recommended central banks to gather more information on the financial exposures of Libor-related products “for a more accurate assessment of potential overall impact and monitoring of market functioning over LIBOR discontinuation” and also that central banks – including the BSP – implement risk assessment and impact analysis. It also recommended the trading of new ARR-based products such as bond issues, futures and swaps.