Term RFRs

At a recent ISDA meeting, a FCA representative, Edwin Schooling-Latter, positively commented on the achievability of term versions of RFRs. His comments are presented in a recent Risk article titled ''Term versions of RFRs will work – FCA official''.

This comments goes in the direction of the opinion of many (but not all) market participants but is in opposition to many regulators public comments (in particular the FSB OSSG) and against the indication in the FAQ associated to the ISDA consultation on IBOR fallback. The term rates are not even an option in the ISDA consultation.

There are two different issues associated to the "term rates" question: the IBORs fallback and the standard for new trades.

For new trades, you can change the rules and do what you want/is the most convenient in the circumstances.

For legacy trades, the fallback changes the reference rate when the contractual one is not available, but does not change the other aspects of the contracts. For those, a term rate is a requirement, not merely one of the options. The choice is between a term rate and chaos (with different levels of chaos possible). It seems there is a willingness to move the main benchmarks from Interbank (IBOR) to pseudo-risk-free rate (RFRs). If this is the case also for IBOR fallback, the choice is between term versions of RFRs and chaos.

My interpretation of the backing by FCA of term RFR is the following: "better to have a meaningful number which make sense than to have market chaos".

My equivalent interpretation of refusal of term RFR by other regulators is: "better to have chaos than to change the wording of a previous opinions based on a political agenda for the market".

There was manipulation of benchmarks in the past, and it is better to avoid it as far as possible in the future. Should it be at the cost of destroying the present or should the future be constructed in a orderly and efficient way taking into account the present?

All of the above are personal interpretations, opinions and questions!

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