Fall-back Benchmark Consultation

NZFMA intends to consult on a fall-back benchmark interest rate for BKBM in mid to late January 2019. A fall-back benchmark interest rate is required to comply with the IOSCO Principles for Financial Benchmarks and will ensure that BKBM will meet European Union Benchmark Regulation (EU BMR) equivalence going forward. This will ensure that the current benchmark, BKBM, remains fit for purpose, can be used by European supervised entities post 2020, and the necessary structures are in place should BKBM cease to exist at some point in the future. The consultation will likely be open for a period of six weeks. The NZFMA also intends to run seminars in both Wellington and Auckland in early 2019 to provide an overview and answer questions. The NZFMA will also be available to discuss this consultation bi-laterally.

NZFMA formed a small working group in September to consider the framework for the consultation and potential fall-back options to put forward in the consultation. The consultation document provides background, the reason a fallback interest rate is required, and the criteria used to consider possible options. The document seeks responses on the criteria used, the three proposed options, options that were considered and discarded, and the calculation of term and credit margins if an overnight risk-free rate (RFR) is chosen. Lastly, the consultation seeks feedback on the role of the benchmark administrator.

Globally, a number of countries have already identified an overnight RFR as their fall-back benchmark interest rate. Countries include the United States, United Kingdom, Switzerland, Japan and Australia. In the US both Regulators and the Central Bank have made clear statements that they will no longer support LIBOR as the US dollar interest rate benchmark post 2021. They are encouraging benchmark users to transition to the new overnight RFR (SOFR). In Australia, they have chosen a multi-rate approach retaining BBSW and implementing an overnight RFR, the RBA cash rate. These global developments have a bearing on the direction New Zealand takes with its fall-back interest rate benchmark, given the large volume of NZ dollar/US dollar derivative transactions that are written each year with a reference to each currencies interest rate benchmark.

Can you please ensure that all relevant people within your organisation are notified about the upcoming consultation. If you have any questions or comments on the proposed consultation please do not hesitate to contact John Groom, Director Operations and Compliance at the NZFMA (john.groom@nzfma.org).