What Challenges Exist with the Transition from IBORs to RFRs?
By Mohamed Ismail
A featured article of our January 2020 edition of PRMIA's Intelligent Risk quarterly newsletter
As we embark on a new decade, the challenge of replacing all ‘Inter-bank offer rates’ (IBORs) with ‘Risk-free rates’ (RFRs) remain a top priority for thousands of banks, insurers, corporates, and asset managers worldwide. By now, many financial organizations have acknowledged the industry-wide deadline of December 31, 2021 and have started building strategic groups, teams, and secured funding to address this complex initiative. An estimated $350 MM (USD) gross notional contracts, largely made up of OTC and exchange-traded derivatives make up a bulk of the traded products referencing IBORs, followed by debt, structured, and cash products. The aim is to produce a new benchmark rate free of market subjectivity and manipulation, promoting fair transaction-based valuations that represent the activity in the financial markets. While organizations such as the CME have cleared millions of futures contracts referencing RFRs (i.e. – the ‘Secured Overnight Financing Rate’ SOFR), the industry is still struggling, sparking industry-wide debate and strategic alliances to avoid a potential systemic catastrophe.
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