A personal statement on the IOSCO Statement on Alternatives to USD Libor

IOSCO has issued a document called “Principles for Financial Benchmarks” in 2013. As such it acted as an (unofficial/unelected) lawmaker.

On 3 July 2023, the same IOSCO issued a “Statement on Alternatives to USD Libor”.

The Statement looks like a tribunal judgement from a trial with no public hearing, no witness, and no defense right from a tribunal with no mandate to judge. And publish on the day before Independence Day!

Some personal comments on the document.

Transparency

The statement indicated “Administrators should consider whether to improve the transparency of their rates".

The IOSCO document lack minimum transparency. It does not indicate in any way the “varying degrees of vulnerability of concern“ of the analysed benchmarks. The name of the benchmark are not even indicated. This creates a culpability by association to all non-SOFR benchmarks.

The statement refers to a Review of Alternatives to USD Libor; to my knowledge, the review itself is not available. The statement is not signed. There is no way to discuss transparently with its authors.

Inverted pyramid

SOFR is based on a market with around 1,000 to 1,500 billions of daily underlying repos. The SOFR-OIS outstanding amount at LCH only is around 100,000 billions with daily fixings. This is a ratio 100 fixing for each underlying. This is not an inverted pyramid according to IOSCO.

The daily underlying for the CME SOFR Term rate (1 quarterly 3-month + 3 monthly 1-month) is around 250 billions futures (plus short-term OIS with also a large volumes) to determine the 3-month fixing. To reach the 100 ratio, we need 250 * 100 * 60 = 1,500,000 billions of CME Term notional. The last 60 factor is due to quarterly reset of the instruments linked to 3-month term rates; which corresponds roughly to 60 business days.

The monthly volume of Term SOFR swaps is below 100 billions (see Clarus blog). With such a low volume, it impossible to reach anything close to the amounts from the previous paragraph, which are, according to IOSCO statement, an indication of absence of inverted pyramid.

For BSBY, the Clarus blog reference above indicates a volume below 1 billion a month. Each million a day of the underlying instruments used for the fixing would lead, using the same methodology as for Term SOFR, to 1M * 100 * 60 = 6 billion availability in outstanding derivatives without reaching the inverted pyramid.

According to Bloomberg site related to BSBY, the rates are "based on the activity of a transparent list of 34 eligible banks and capturing typically over $200bn of trades and executable quotes daily across the maturity spectrum". This is for all tenors (not only 3 months). Very conservatively, that would mean a minimum of 10 bn related the 3-month tenor. A 60,000 billions of outstanding notional would stay under the IOSCO review "non-inverted" pyramid level.

In both cases it is very difficult to see a potential inverted pyramid with more “inversion” than the SOFR pyramid.

Terminology

The statement indicated that “refrain from any representation that the CSRs reviewed are “IOSCO-compliant”.”. I fully agree with this statement, from a terminology point of view it should be “IOSCO-benchmarks-principles-compliant”. A benchmark should be compliant to principles (on a voluntary basis), not compliant to an (unrepresentative, non-elected, uncontrolled) organization.

Licensing restriction

In one of the episode of my Season 1 of “Game of Benchmark” in 2017, I discussed transparency of benchmarks. From my point of view, what should be part of transparency is (I quote from the previous post):

The benchmark itself should be public information; the numbers should be made public as soon as known, no license or fee should be required to obtain the number. Any analysis, of current data or historical data can be run by all interested parties, including any party in a trade, academics, regulators, etc. All the data used for the computation of the benchmark should be fully public as soon as known, no delay in the publication is allowed. Allowing a license/patent/fee on benchmarks used by retail (I’m not speaking here of the interbank market, where professionals are on an equal footing and free to chose their weapons), is creating an undue legal protection to block the fair assessment of the situation.

This exactly the opposite of what IOSCO wants. They want to impose “Licensing restriction” “within certain products or by certain user groups”. In practice, that means higher cost (see the CME Term rate basis), restriction on risk management and no independent analysis of the benchmark content.

Note on 2023-07-08: The paragraph related to the volume of trades used to determine BSBY has been added.

Note on 2023-07-09: With the FCA imposed synthetic LIBOR based on CME term rate, from my above transparency requirement, no licensing restriction should exists on SOFR CME Term Rate.

Note on 2023-07-09: Now that I have written on this issue, I'm expecting other journalists to follow suit. I will try to list below the relevant articles I find.

Note on 2023-08-19: Some recent articles related to the IOSCO comments:

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