Banxico Ready to Eliminate LIBOR RatesBy Emilio Aristegui | Tue, 10/12/2021 - 08:46
As LIBOR rates continue to lose relevance and creditability around the world, Banxico aligns with international entities to eradicate these rates from the Mexican economy through a smooth transition.
The Bank of Mexico (Banxico) officially announced the transition of LIBOR (London Interbank Offered Rate) to the new established FSB (Financial Stability Council) and the IOSCO (International Organization of Securities Commissions) via a press release, as Banxico seeks to comply with new regulations to help with the global financial stability. With the help of the FSB’s Coordination Group of the Public Sector (OSSG) Banxico has actively participated in this important transition.
Banxico’s press release reads, "The FSB has emphasized that financial and non-financial companies in all jurisdictions should continue their efforts to make greater use of reference rates aligned to international standards.” The objective of this new transition is to decrease the use of rates that are not based on market facts. Which is the case in LIBOR rates, as these are the most common benchmark interest rate indexes often used for adjustments to adjustable-rate mortgages. Banxico also declared that by the end of 2021 these rates will stop being published for some terms.
John Kiff, Senior Financial Sector Expert in the Monetary and Capital Markets Department of the International Monetary Fund (IMF), also published a report regarding LIBOR rates, “LIBOR was often called a ‘convenient fiction’ because of the disconnect between the LIBORs used as benchmarks and actual borrowing in the London interbank market. Most banks loan each other for a week or less, so most LIBORs for longer maturities are set on the basis of educated guesses.”
According to Banxico, LIBOR rates will cease to be traded through consultation panels after June 30, 2023. However, some of these rates could continue to be published under a synthetic methodology that will be defined by the FCA. Meanwhile, the FSB published a report indicating that a smooth transition from LIBOR rates is set to take place by the end of 2021. The FSB also went into more detail highlighting that the majority of LIBOR panels will no longer exist by the end of 2021, while also publishing five documents to help with the transition. The FSB hopes that with these five tools that include an updated global transition map, a paper reviewing overnight risk-free rates and term rates, a statement on the use of the ISDA spread adjustments, a statement encouraging authorities and a statement on benchmark transition.
Banxico informed that a 10-day public consultation beginning on October 8, 2021 will seek to begin a process on modifications to provisions corresponding to the reference rates cited on their press release. The Bank will continue to follow-up on international rates and international activities regarding these changes to maintain an updated and modern financial system.