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Finansinspektionen Analysis 14: Reference Rates Are Changing

Date 29/11/2018

Reference rates are important since they are used in many financial contracts, and it is therefore crucial that they are fair, transparent and accurately reflect the underlying market. 

Following the financial crisis in 2008 and the LIBOR scandal in 2012, the rules for reference rates were tightened. Despite stricter regulation, however, there are still problem areas through which reference rates can be manipulated. In order to come to grips with such problems, authorities in several countries and regions have taken initiatives to replace the existing reference rates with new transaction-based interest rates.

Sweden has not yet begun a transition from STIBOR, the Swedish reference rate, to an alternative reference rate. The framework for STIBOR allows the panel banks to apply some discretionary assessments. The transaction volumes for deposits and lending in SEK between banks are also very low due to long maturities. A transition from STIBOR to an alternative reference rate could take several years to implement even if Sweden is able to draw on the lessons learned in other countries.

Summary:

After the financial crisis in 2008 and the LIBOR scandal in 2012, the rules regulating reference rates were changed to prevent them from being manipulated. Reference rates are important since they are used in many financial contracts, and it is therefore crucial that they are fair, transparent and accurately reflect the underlying market.

Over the past few years, legislators, authorities and private market participants have taken a number of measures to strengthen the integrity of reference rates and prevent them from being manipulated. One such initiative is the EU Benchmark Regulation, which lays down requirements for those who administer and report reference rates.

Despite stricter regulation, however, there are still problem areas through which reference rates can be manipulated. This could happen, for example, if the underlying market, which the reference rates are supposed to reflect, does not have a sufficient volume of transactions. In such a case, the banks that report the underlying data for the reference rates may use discretionary assessments. These assessments may deviate from the assessments of other banks and could be viewed as an attempt at manipulation.

In order to come to grips with such problems, authorities in several countries and regions have taken initiatives to replace the existing reference rates with new transaction-based interest rates. This replacement process could be costly and risky for participants in the financial markets.

Sweden has not yet begun a transition from STIBOR, the Swedish reference rate, to an alternative reference rate. The framework for STIBOR allows the panel banks to apply some discretionary assessments. The transaction volumes for deposits and lending in SEK between banks are also very low due to long maturities. A transition from STIBOR to an alternative reference rate could take several years to implement even if Sweden is able to draw on the lessons learned in other countries.