Scoop has an Ethical Paywall
Work smarter with a Pro licence Learn More

Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

Interest rate benchmark reform

28 January 2020

The Reserve Bank of New Zealand supports the selection of the Official Cash Rate (OCR) as New Zealand’s fall-back benchmark interest rate.

“Global interest rate benchmarks, such as LIBOR, play a substantial role in the valuation of financial derivatives and contracts,” Assistant Governor/GM Economics, Financial Markets and Banking Christian Hawkesby says.

“Reforms are underway internationally to improve the integrity of these benchmarks, following manipulation by several financial institutions overseas.”

While New Zealand’s benchmark interest rate (BKBM) has not faced these issues, the New Zealand Financial Markets Association (NZFMA) has made a number of changes to further improve the benchmark’s reliability and robustness in line with developments in global best practice.

As a part of these improvements the NZFMA, in conjunction with consultation from industry representatives, has selected the OCR to act as the risk-free fall-back benchmark interest rate for BKBM. This conclusion is supported by the Reserve Bank, Mr Hawkesby says.

“In the first quarter of 2020, the International Swaps and Derivatives Association (ISDA) will be updating its 2006 fall-back provisions. Following this it would be prudent for market participants to adopt them in contracts that reference BKBM,” Mr Hawkesby says.

ISDA will also publish a protocol to enable market participants to include fall-back benchmark rates within legacy IBOR trades if they choose to. ISDA has appointed Bloomberg Index Services to calculate and publish the term rate adjustment (using compounded setting in arrears) and credit spread adjustment (using a historical median) for the fall-back benchmark rate should it be needed.

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

Furthermore, the NZFMA has advised that it intends to operate dual interest rate benchmarks, retaining BKBM and developing risk-free rates (RFRs).

“The NZFMA believes BKBM will continue as an important financial benchmark, whilst the use of RFRs will increase in line with international developments,” NZFMA CEO Paul Atmore says.

The new risk-free interest-rate benchmarks will be calculated independently to the BKBM fall-back benchmark rate, with the NZFMA currently developing a term structure methodology.

Internationally, it is widely recognised that LIBOR will no longer be calculated and published beyond 2021. Market participants in New Zealand who have contracts referencing LIBOR should continue preparing for this by transitioning to alternative benchmark rates, and adopting more robust fall-back provisions in their contracts. While some banks have made good progress, market participants need to accelerate efforts to ensure they are prepared for LIBOR cessation by the end of 2021.


ends

© Scoop Media

Advertisement - scroll to continue reading
 
 
 
Business Headlines | Sci-Tech Headlines

 
GenPro: General Practices Begin Issuing Clause 14 Notices

GenPro has been copied into a rising number of Clause 14 notices issued since the NZNO lodged its Primary Practice Pay Equity Claim against General Practice employers in December 2023.More

SPADA: Screen Industry Unites For Streaming Platform Regulation & Intellectual Property Protections

In an unprecedented international collaboration, representatives of screen producing organisations from around the world have released a joint statement.More

 
 
 
 
 
 
 
 
 
 
 
 

Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.