On 8 September 2021, the Board of the International Organization of Securities Commissions (IOSCO) issued a statement on credit sensitive rates.

Among other things the statement notes that regulators are concerned that some of LIBOR’s shortcomings may be replicated through the use of credit sensitive rates that lack sufficient underlying transaction volumes. The disproportionality between the low/modest volume of transactions underlying credit sensitive rates and the increasingly higher volumes of activity in markets referencing them – the so-called inverted pyramid problem – raises concerns about market integrity, conduct risks and financial stability risks. The decline in the underlying activity of some of the credit sensitive rates during stress periods, such as the COVID-19 pandemic, raises additional regulatory concern.

The statement calls on benchmark administrators of credit sensitive rates to consider how their benchmarks would continue to meet Principles 6 and 7 of the IOSCO Principles on Financial Benchmarks over time if use of that benchmark became widespread. Some of these rates are based on similar markets to LIBOR and may replicate many of LIBOR’s shortcomings, as highlighted by authorities in the US and UK.

Principle 6 asks administrators to take into account the ‘relative size of the underlying market in relation to the volume of trading’. Principle 7 emphasises ‘data sufficiency in a benchmark’s design to accurately and reliably represent the underlying market’ measured by the benchmark.

Responding to the IOSCO statement, Andrew Bailey, Governor of the Bank of England and Co-Chair of the Financial Stability Board’s Official Sector Steering Group, said: “Today’s statement by IOSCO further highlights the importance of using robust benchmarks when moving away from LIBOR. Markets should not risk the progress we’ve made by using supposedly credit sensitive rates that do not address LIBOR’s fundamental weaknesses. These rates may well fail to comply with IOSCO Principles if their use became widespread. We need to learn the lessons of LIBOR, and ensure we transition to lasting solutions. I welcome IOSCO’s commitment to monitor the ongoing compliance of financial benchmarks, including credit sensitive rates, with its Principles.”

John C. Williams, President of the Federal Reserve Bank of New York and Co-Chair of the Financial Stability Board’s Official Sector Steering Group, added: “Compliance with all of the IOSCO Principles—consistently over time—is essential to a successful and lasting transition from LIBOR. With this in mind, market participants should now be moving to robust reference rates like SOFR to avoid jeopardizing financial stability.”