benchmarkreform

Benchmark reform refers to the global effort to transition away from interest rate benchmarks that are no longer considered robust or representative. Historically, many key financial benchmarks, such as the London Interbank Offered Rate (LIBOR), were based on submissions from a limited number of banks. Concerns about potential manipulation and the declining volume of underlying interbank lending transactions led to a loss of confidence in these benchmarks.

The primary goal of benchmark reform is to replace these problematic benchmarks with new, alternative reference rates (ARRs). These ARRs are typically based on actual transaction data from liquid markets, making them more robust and less susceptible to manipulation. Examples of ARRs include the Secured Overnight Financing Rate (SOFR) in the United States, the Sterling Overnight Index Average (SONIA) in the UK, and the Tokyo Overnight Average Rate (TONA) in Japan.

The transition involves a complex process of repapering contracts that reference old benchmarks, developing new financial products based on ARRs, and educating market participants. Regulators worldwide have been actively involved in overseeing and driving this reform agenda to ensure financial stability and market integrity. The discontinuation of legacy benchmarks and the widespread adoption of ARRs are intended to create a more resilient and trustworthy financial system.