In a new Global Benchmark Report, ISDA, SIFMA and several other trade associations (collectively, "associations") highlighted that few market participants have implemented programs to begin the transition from interbank offered rates ("IBORs") to alternative risk-free rates ("RFRs"). They noted, however, that the associations found relatively high benchmark transition awareness among market participants. The associations drew conclusions from a survey conducted by Ernst & Young LLP of 150 market participants (banks, end users, infrastructure providers and law firms) across 24 countries.

In the study, the associations analyzed the "gap between awareness and action." The associations reported that a high proportion of the respondents were already engaged in RFR working groups and that the gap between awareness and action may be much greater among other market participants, particularly corporate entities and investors. The associations stated that market participants may be waiting to implement the transition to alternative RFRs due to, among other reasons:

  • a lack of awareness concerning exposure to IBORs;
  • waiting for the widespread adoption of alternative RFRs in other products, such as derivatives, cash products, futures and forward rate agreements, money market instruments, and various types of options;
  • basis risk, especially between cash products and related derivatives that may transition to alternative RFRs on different timelines; and
  • uncertainty and a lack of guidance in approaching key issues, such as the amendment of legacy positions.

The associations urged market participants to take "immediate action," noting that "[w]ith every new IBOR trade executed, the extent of IBORs expected to be outstanding post-2021 (or post-2019 in the case of EURIBOR) will increase."

Commentary / Lary Stromfeld

The survey and report on IBOR transition provide valuable additional insight into the state of market preparedness and the challenges going forward. Not surprisingly, given the complexity and pervasiveness of the transition, many market participants are waiting for "the market" to come up with "the solution." But, the impact on an individual market participant cannot be borne by others. While the Trade Associations continue to develop standards for documentation and trading of RFRs, individual borrowers, investors and issuers must begin to assess and catalog the IBOR terms of their own portfolios.

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