Transaction-based reference rate

The Riksbank will start to publish a new transaction-based reference rate for the shortest maturity in SEK. In January 2021, the Riksbank will begin a test period when a preliminary reference rate will be published. The official reference rate will begin to be published after the test period has been completed.

The Riksbank will start to publish a new transaction-based reference rate for the shortest maturity in SEK. Reference rates fulfil an important function in the financial system. They are used by a number of different markets participants on the financial markets and make it possible to achieve a high degree of standardisation of the pricing of financial products. Comprehensive work is currently being done to develop new, transaction-based reference rates all over the world.

The Riksbank will calculate, publish and administer the new transaction-based reference rate. The calculation of the reference rate is based on data on transactions on the Swedish money market, collected by the Riksbank since October 2019 with the aim of providing the Riksbank with a basis for its assessment of the implementation of the Riksbank’s monetary policy.

In December 2019, the Riksbank decided to start calculating and publishing a new reference rate for the very shortest maturity (overnight or O/N). This  decision was preceded by a consultation round which provided positive responses from all respondents.

In October 2020 the Riksbank, in a second consultation, invited external stakeholders to provide comments and views on the design of the new reference rate.

In November 2020, the Executive Board of the Riksbank decided on the design of the new reference rate.

In January 2021, the Riksbank will begin a test period when a preliminary reference rate will be published. The official reference rate will begin to be published after the test period has been completed.

The interest rate the Riksbank currently terms the reference rate, which is set once every six months, will not be affected.

Frequently asked questions – the Riksbank’s new reference rate

The Riksbank’s role as administrator of a new transaction-based reference rate

Why is the Riksbank developing a transaction-based reference rate?

Reference rates fulfil an important function in the financial system in Sweden and in other countries. They are used by a number of different financial market participants, and make it possible to achieve a high degree of standardisation of the pricing of financial products. In the wake of the global financial crisis in 2008–2009 and the manipulation of the LIBOR reference rate uncovered in 2012, confidence in traditional reference rates has been damaged. This has given rise to comprehensive international reform work to develop alternative, transaction-based reference rates. In many countries, central banks have taken on the responsibility of developing these rates and, in December 2019, the Riksbank decided to do likewise. The fact that the central bank is providing a reference rate adds credibility to the reference rate.

The Riksbank will become ‘administrator’ of a transaction-based reference rate. What does this mean?

As administrator of a transaction-based reference rate, the Riksbank takes responsibility for organising and structuring (i) the collection of transaction data, (ii) the calculation and publication of the reference rate, and (iii) the establishment of an oversight function in line with the applicable parts of the IOSCO Principles for Financial Benchmarks. The IOSCO principles are a set of international standards that form a framework for reference rates and other benchmarks.

Interbank-based reference rates, known as IBORs (InterBank Offered Rates), also have an administrator that guarantees their quality and that calculates and publishes them. Private administrators of reference rates in the EU must fulfil the requirements of the EU Benchmark Regulation.

What preparations are required for the Riksbank to be able to publish a transaction-based reference rate?

It is important that the test period with the provisional reference rate takes place when the market and other relevant users have the time and opportunity to both review and provide feedback to the Riksbank on the rate, framework, publication methods and other structures and systems before the Riksbank starts to publish the official reference rate. But it is also important that the provisional transaction-based reference rate is not delayed for too long as international developments are moving quite rapidly and there is a considerable need for such a rate in Sweden as well.

The IOSCO principles provide guidance on matters such as the calculation of the reference rate, the quality of the data on which the reference rate is based, and oversight. This means that there are many components that need to be in place ahead of the publication of the reference rate, in addition to the actual method of calculation. The test period is important in that it will promote quality assurance and enable the administrator to test the infrastructure required to provide a reference rate.

Are there any regulations or principles concerning reference rates of this type and their administrators?

In 2013, the International Organisation of Securities Commission, IOSCO, published 19 principles for financial benchmarks, including transaction-based reference rates. Among other aspects, these principles cover the data that should form the basis of reference rate calculations, documentation and transparency of the calculations, and guidance on the administrator’s internal oversight. The central banks already supplying reference rates comply with and use the IOSCO principles for self-assessment purposes. Like other central banks, the Riksbank intends to follow the relevant and applicable principles and use them in its self-assessment. In addition, the Riksbank, like other central banks, intends to ensure that relevant stakeholders and users are given the opportunity, through an established channel, to provide advice to the Riksbank as administrator.

The Benchmarking Regulation entered into force in the EU in 2018. This regulation imposes requirements both on the banks who report transaction data and on the administrators who calculate and publish a reference rate based on the reported data. Central banks that are administrators of a reference rate are explicitly exempt from the Benchmarking Regulation. Instead, most of the central banks presently supplying reference rates have chosen to comply with and perform self-assessment in accordance with the IOSCO principles.

Underlying data and calculation – The Riksbank’s proposal for a new reference rate

Why is the reference rate calculated and published the day after the transactions upon which it is based take place?

To calculate the rate, the Riksbank needs to gather transaction data from the reporters. These agencies submit data at the end of the day, once all the day’s transactions have been processed in their internal systems. As the transaction data also needs to be checked for quality, it is not possible to publish the rate earlier than the morning after the transaction day. This is in line with how other international reference rates and STIBOR currently function.

To ensure the satisfactory functioning of all the systems, routines and processes in place to guarantee the quality of the underlying transactions and the calculation of the reference rate, the Riksbank proposes to have a later publication time (11.00 CET) during the test period. After the test period, it is the Riksbank’s aim to publish at an earlier time.

What data will be used as a basis for calculating the transaction-based reference rate?

Since October 2019, the Riksbank has been collecting data from its monetary policy counterparties on transactions in SEK with a maturity of up to 10 days. The Riksbank works constantly to ensure the quality of and to analyse this data, some of which will be used as a basis for the calculation of the new, transaction-based reference rate. In this work, the Riksbank is in close dialogue with the reporters via both webinars and bilateral meetings. The work also includes developing systems and identifying requirements for the validation and quality assurance of data at both reporters and the Riksbank.

Why is the Riksbank’s proposed reference rate only based on transactions that result in borrowing for the reporters?

The new reference rate should reflect banks’ funding costs in Swedish kronor at the very shortest maturity. In addition, the market for unsecured borrowing overnight is the most liquid market at the shortest maturity in terms of number of transactions and transaction volumes. It is therefore natural to base the reference rate on this type of transaction. Furthermore, such a reference rate will be both robust and representative of the underlying market.

What demands does the Riksbank place on the reporters of transactions to ensure that the data is correct?

Reporters have an obligation to report correct and relevant transaction data, which is regulated via the Terms and Conditions for RIX and Monetary Policy Instruments. Within this obligation, reporters must have processes and routines to ensure the transaction data is correct. Reporters follow the guidelines for reporting in a user manual. Furthermore, the Riksbank is currently designing and implementing its own systems for validating and assuring the quality of reported transactions on a daily basis.

How does the Riksbank ensure that the transaction data is not manipulated by the reporters?

The Riksbank performs regular checks on the transaction data and places demands on how and when it is to be reported. In addition, the transaction data included in the calculation of the reference rate must fulfil certain robustness requirements to reduce the risk of manipulation as much as possible. The Riksbank will perform daily checks to ensure the quality of the transaction data prior to publication. As part of this process, feedback will be given directly to the reporters. Work to improve these checks is also ongoing. The Riksbank will also establish an internal oversight function, one of whose tasks will be to monitor that the Riksbank as administrator has a method and work routines to check transaction data.

What robustness requirements does the Riksbank impose on the transaction data?

A number of robustness requirements are used to ensure that the transaction data is representative of the underlying market and that it is robust enough in terms of transaction volume and number of reporters, and to reduce the risk of any manipulation of the reference rate. These robustness requirements for the transaction data determine whether it is appropriate to calculate the reference rate using a normal calculation method. They aim to create confidence in the reference rate. It is also important, however, that the requirements are not too demanding and lead to an alternative calculation method being used too often, which risks having the opposite effect and undermining confidence in the reference rate. 

For the Swedish market, the Riksbank has identified three robustness requirements that are relevant to the calculation of the reference rate. The Riksbank therefore proposes that the following three criteria must be fulfilled in order to calculate the reference rate using a normal calculation method:

  • The total transaction volume must be a minimum of SEK 6 billion
  • A minimum of 3 reporters (out of 9 in total) must be represented
  • A single reporting agency may make up a maximum of 75 per cent of the total transaction volume

Why does the Riksbank trim the transaction data before calculations are made. Is it not better to consider all transactions? 

The aim of trimming is to systematically remove all or some of the transactions made at an interest rate that deviate substantially from the others in the sample so as to render the data more homogeneous and thus make it easier to represent it with a single interest rate. There is, however, a conflict between making the data representative of the underlying market in the best way and producing a rate that is representative of the underlying dataset in the best way. To represent the underlying market, the data should be trimmed as little as possible. On the other hand, the data becomes more homogeneous the more it is trimmed. More trimming also potentially leads to a more stable rate. This is not always true, however, and depends on how the data is broken down. Data trimming is relatively common internationally. The main argument for trimming is that it helps to mitigate the risk of manipulation and reduces the variation in the reference rate from day to day.

How will the Riksbank’s reference rate be calculated in normal circumstances? 

According to the proposed method, the normal calculation method for the reference rate occurs in several steps. Below is a summary of the different steps in the proposed calculation:

  • The reported transactions undergo both automatic and manual qualitative checks carried out by the Riksbank in cooperation with the reporters.
  • The transactions are put through a filter which sorts out the relevant transactions to be used in the calculation of the reference rate. This data consists of unsecured transactions in Swedish kronor with a maturity of O/N made between a reporting agency and one of the following counterparts: Banks, the Swedish National Debt Office (NDO), Financial institutions and Non-financial corporations.
  • The transaction sample is divided into four sub-groups (Major banks and the NDO, Other banks, Financial institutions and Non-financial corporations). These four transaction datasets are each trimmed by 25 per cent.
  • A volume-weighted mean rate is then calculated for the whole of the trimmed transaction dataset.

How does the Riksbank propose to calculate the rate if the transaction data does not fulfil the robustness requirements?

An alternative calculation method is used if the transaction dataset does not fulfil the following robustness requirements:

  • The total transaction volume must be a minimum of SEK 6 billion
  • A minimum of 3 reporters (out of 9 in total) must be represented
  • A single reporting agency may make up a maximum of 75 per cent of the total transaction volume

Under the proposal for an alternative calculation method, the transaction sample for the alternative calculation consists partly of transactions from the transaction day that do not meet all of the robustness requirements, and partly all of the transactions from the two preceding working days. An average historical difference is calculated between the reference rate and the policy rate for these three days, and then added to the current policy rate.

In the event of technical problems leading to the relevant transactions for the day’s calculation not being available, the alternative calculation method would only use historical data, i.e. the difference between the reference rate and the policy rate for the two most recent published days. In such cases, the alternative calculation method would not include the transactions from the current transaction day as it will not be possible to access these.

How will the Riksbank deal with errors in the underlying data or calculation after publication?

If errors are discovered after the first publication but before 13.00 CET on the publication day, the Riksbank will ask the reporting agency to send corrections. If all corrections after recalculation affect the outcome of the reference rate by more than two basis points, the Riksbank will publish a revised rate at 14.00 CET. Otherwise, the first publication of the rate will apply.

If the Riksbank were to discover errors afterwards, the Riksbank will also ask the reporting agency to send corrections. No changes will be made to the published (official) reference rate, however. The Riksbank will instead publish a corrected rate series afterwards, purely for informative reasons.

Publication – The Riksbank’s proposed Fixing process

Why is the reference rate being published during a test period without being an official reference rate? Why not just publish it when it is ready and has been tested by the Riksbank?

To be able to use the reference rate in commercial contracts, market participants need to know how it works. The aim of the test period is for the market to be able to familiarise itself with the reference rate. Both the reporters and the Riksbank will also have the chance to test their routines for reporting, data checking and calculation during this period so that a quality-assured rate can be published after the test period. In addition to this, any shortcomings in the framework and other aspects not discovered prior to the test period can be rectified during this period.

What happens if the Riksbank cannot publish the reference rate due to technical problems?

In the event of technical problems leading to the malfunction of normal reporting channels, the reporters can send in their transactions via alternative channels.

If technical problems occur that result in the transactions for the day’s calculation not being available due to a full-scale system failure, the Riksbank can use the proposed alternative calculation method that can be performed manually. The alternative calculation method will only use historical data, i.e. the reference rate and the policy rate for the two most recently published days. It therefore does not include the transactions from the current transaction day, as these will not be accessible.

Why does the Riksbank propose to publish additional data/statistics at the same time as the reference rate?

Together with the publication of the reference rate, expressed to three decimal places, the Riksbank proposes that the following information be published daily:

  • Number of transactions on which the calculation is based.
  • Total transaction volume.
  • Number of reporters that have contributed at least one transaction.
  • Applied calculation method; normal or alternative.
  • If appropriate; the reason why the alternative calculation method has been used

The aim of publishing this additional information is to be as transparent as possible about the underlying data and calculations. But as the Swedish overnight market is small and dominated by a small number of large participants, it is important that the Riksbank does not publish information that risks disclosing details of an individual participant’s transactions.

About the new reference rate – How does the Riksbank proposal relate to national and international circumstances?

Why are transaction-based reference rates being developed around the world?

Traditionally, so-called interbank rates (Interbank Offered Rates, IBORs), such as STIBOR, are used as reference rates. These are the rates that banks request from or offer each other for short-term uncollateralised loans. IBORs are calculated based on banks’ offers, or judgements, of interest rates and not on actual transactions. Over time, banks have borrowed from each other without collateral to a lesser degree, which has led to fewer transactions for the banks to base their offers on. The background information used to set the interbank rates has thus, in some cases, both changed and deteriorated since the rates emerged. When there are few transactions, the reporting banks need to make a judgement of what would be a reasonable interest rate for uncollateralised loans at the relevant maturity in the prevailing market situation. This judgement becomes the bank’s reported offer, which later, in addition to offers based on actual transactions, forms the basis of the calculation of the reference rate. When reference rates are calculated based on reported offers, there is also a risk of manipulation. During the LIBOR scandal of 2012, it was revealed that several international banks had manipulated the LIBOR reference rate for their own benefit, or for the benefit of individual employees. This scandal, as well as the fact that the number of interbank transactions had decreased over time, damaged confidence in traditional reference rates globally. This marked the start of comprehensive international reforms.

Do other central banks publish similar reference rates?

In line with international recommendations to develop transaction-based reference rates, several central banks have taken on the responsibility of publishing new rates at the shortest maturity. Since the spring of 2018, for example, the central banks in the United Kingdom and the United States have published new transaction-based reference rates called SONIA (Sterling Over-Night Indexed Average) and SOFR (Secured Overnight Financing Rate) respectively. Since the autumn of 2019, the European Central Bank (ECB) also publishes a transaction-based reference rate called €STR (Euro Short Term Rate). The central banks in Canada, Japan and Norway, for example, also calculate and publish transaction-based reference rates.

How will the Riksbank’s proposed reference rate relate to similar international reference rates?

The Riksbank is following international developments. The Riksbank has also analysed Swedish conditions. It is important to point out that different countries have developed different kinds of reference rates depending on how their national markets function. A common feature is, however, that all reference rates for the major currency areas are calculated at the very shortest maturity (O/N). Several are also based on completed borrowing transactions. A comparison of a sample of international reference rates shows that the main difference between them concerns the type of transactions and the transaction counterparties. The Riksbank’s proposed calculation method for the new reference rate is in line with international practice as the Riksbank, like many other central banks, will calculate a volume-weighted mean rate.

How is the Riksbank’s work linked to the work and recommendations of AGAR (“Arbetsgruppen för Alternativa Referensräntor”, Working Group for Alternative Reference Rates)?

Under the administration of the Swedish Bankers’ Association, AGAR (“Arbetsgruppen för Alternativa Referensräntor”, Working Group for Alternative Reference Rates) has developed recommendations concerning the definition and calculation method for a new reference rate and a proposal for the administrator of the new reference rate. In May 2020, AGAR submitted its final recommendation concerning the fixing process for a new reference rate, i.e. how a new reference rate should be determined and calculated. AGAR’s work was concluded with the publication of its final recommendation. The Riksbank participated as an observer in AGAR.

AGAR’s work includes a well-prepared analysis and recommendations that have proved very useful to the Riksbank in its ongoing work. Above all, AGAR’s recommendation reflects the wishes of the largest players on the Swedish banking market. As the Riksbank has now undertaken to administrate a new reference rate, it must take on the responsibility to perform its own analysis of the transaction data that banks have provided since October 2019. 

How does the Riksbank’s reference rate relate to the present reference rate, STIBOR? 

When the Riksbank starts to calculate and publish the new reference rate, it will firstly be a complement to STIBOR. The Riksbank’s new reference rate is based on transactions in Swedish kronor on the overnight market, i.e. transactions with a maturity overnight (O/N). The transaction data is extensive and includes more than just interbank transactions.

STIBOR, on the other hand, is calculated for different maturities and is based on the offers of banks. When there are no transactions, the offer is based on the interest rate at which banks are willing to lend to each other at different maturities. However, the banks are obliged to lend their respective bid rates to other banks in the STIBOR panel if a borrowing request arises. The Riksbank’s reference rate corresponds most closely to STIBOR’s shortest rate that has the maturity of next banking day to the day after (tomorrow/next).

Will STIBOR continue to exist as a reference rate?

In Sweden, no decisions have been taken to stop publishing STIBOR. Under the EU Benchmarking Regulation (BMR), the administrator of STIBOR (which is classed as a critical reference rate) must apply for authorisation before the end of 2021. Finansinspektionen decides whether STIBOR and its administrator fulfil the requirements of the BMR and can thereby be authorised.

How should the Riksbank’s new reference rate be interpreted in relation to the Riksbank’s monetary policy?

Starting to publish the new reference rate will not change the Riksbank’s monetary policy strategy. The aim of the Riksbank’s framework for the implementation of monetary policy is still to stabilise short-term interest rates on the money market. However, the new reference rate will provide valuable information on the situation in the overnight market for Swedish kronor and in particular on the current funding situation for market participants. The Riksbank has not previously had access to this information. But when, in October 2019, the Riksbank’s monetary policy counterparties began reporting transactions with maturities of up to 10 days on various market segments, the Riksbank could start to analyse short interest rates more systematically.

It is also important to know that the Riksbank does not have, and has never had, an operational target to evaluate the effectiveness of how its monetary policy is implemented. The Riksbank therefore does not have any operational target for how the new reference rate should relate to the repo rate. Variations in the new reference rate will not have any direct bearing on monetary policy. Together with other retrieved information, the Riksbank will regularly analyse and evaluate the information in the new reference rate.

What would happen to the definition of the reference rate if activity in the overnight market were to change substantially, due to a new crisis or regulatory changes, for example?

The Riksbank constantly monitors developments in the financial markets. If the underlying market for the reference rate were to change so that a review of the calculation method became necessary, the Riksbank will announce this in good time and ensure that sufficient support is gained for a new method prior to it coming into effect.

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Updated 18/11/2020