Transaction-based reference rate
The Riksbank will start to publish a new transaction-based reference rate for the shortest maturity in SEK. Following a decision on the final design of the rate, the Riksbank will initiate a test period when it will publish a preliminary rate and then begin publishing the final reference rate. The Riksbank will give prior notification before beginning to publish a preliminary rate.
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.
Following a decision on the final design of the rate, the Riksbank will initiate a test period when it will publish a preliminary rate and then begin publishing the final reference rate. The Riksbank will give prior notification before beginning to publish a preliminary rate.
The interest rate the Riksbank currently terms the reference rate, which is set once every six months, will not be affected.
FAQ The Riksbank’s 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 actors on the financial markets and make it possible to achieve a high degree of standardisation of the pricing of financial products. In light of the global financial crisis that broke out in 2008 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, it is the central banks who have taken the responsibility of developing these rates and, in December 2019, the Riksbank also decided to take on this responsibility. That the central bank provides a reference rate can affect the credibility of the reference rate in a positive manner.
Which data will be used as a basis for calculating the transaction-based reference rate?
Since October 2019, the Riksbank has been collecting information from its monetary policy counterparties on transactions in SEK with a maturity of up to 10 days. The Riksbank is now working on quality assurance and analysis of this data, which will be used as a basis to calculate the new, transaction-based rate. In this work, the Riksbank is in close dialogue with the reporting entities via both webinars/seminars and bilateral meetings. This work also includes developing systems and identifying requirements for the validation and quality assurance of data among both reporting entities and the Riksbank.
The Riksbank will become ‘administrator’ of a transaction-based reference rate. What does this mean?
The Riksbank's status as administrator of a transaction-based reference rate means that the Riksbank is taking responsibility for organising and structuring (i) the collection of data, (ii) the calculation and publication of the interest rate, and (iii) the establishment of an oversight function that, where applicable, is in line with the IOSCO principles for financial reference rates. The IOSCO principles are a set of international standards that form a framework for reference rates.
Interbank-based reference rates - known as IBOR (Inter Bank Offered Rates) - also have an administrator that guarantees their quality and that calculates and publishes these rates. The administrator of reference rates in the EU must fulfil the requirements of the EU Benchmarks Regulation.
What preparations are required for the Riksbank to be able to publish a transaction-based reference rate?
It is important for the preliminary reference rate to be released and published in a time when the market and other relevant users have the time and opportunity to review and provide feedback on the rate, its framework, the publication methods and other structures and systems before the Riksbank starts to publish the final reference rate. This means it is not appropriate to start a test period in the middle of the ongoing coronavirus crisis, when both the banking system and the Riksbank have to invest large amounts of resources on other activities.
The IOSCO principles provide guidance on matters such as methods for calculating the reference rate, the quality of the data on which the reference rate is based, and oversight of the reference rate. This means that there are many components that need to be in place ahead of the publication of the reference rate, apart from the actual method of calculation. For the Riksbank, it is important that all components be implemented so that the reference rate can enjoy a high level of confidence and be perceived as credible. The reference rate must be quality-assured, published on time every day and be covered by a framework that creates transparency and security.
How is the Riksbank’s work linked to the work and recommendations of AGAR (the Swedish working group for alternative interest rates)?
Under the administration of the Swedish Bankers’ Association, AGAR (the working group for alternative interest rates) has worked to develop recommendations concerning definition and calculation methods for a new reference rate and proposals for an administrator of the new reference rate. In May 2020, AGAR submitted its final recommendation concerning the fixing process for a new reference rate, which recommends how a new reference rate should be determined and calculated. AGAR’s work was concluded with the publication of the final recommendation. The Riksbank participated as an observer in AGAR.
AGAR’s work includes well-prepared analyses and recommendations that the Riksbank can benefit from in our ongoing work. Above all, AGAR’s recommendations reflect the wishes of the market. As the Riksbank has accepted the administration of a new reference rate, this means that the Riksbank - in the role of administrator - must take the responsibility of making its own analysis of the data we have collected since October 2019. This is the data that will be used as a basis for calculating the new reference rate. This data set is unique in Sweden and thus is not completely comparable with the material that AGAR worked with in its analysis.
Why are transaction-based reference rates being developed around the world?
Traditionally, InterBank Offered Rates (IBOR) have been used as reference rates. These are the rates that banks demand from each other (or offer each other) for short-term uncollateralised loans. IBOR are calculated based on the banks’ offers for - 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 transactions are few, the banks contributing input data 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 alternative reference rates, several central banks have taken on the responsibility of publishing new transaction-based reference 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 OverNight Indexed Average) and SOFR (Secured Overnight Financing Rate) respectively. Since the autumn of 2019, the 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 new transaction-based reference rates.
How will the Riksbank’s reference rate relate to similar international reference rates?
The Riksbank is following international developments. The Riksbank will also have to make an assessment and an analysis of which aspects are applicable in Sweden. It is important to point out that different countries have developed different kinds of reference rates depending on how their national markets function. Types of transaction and counterparties in transactions differ from country to country. The Riksbank is currently working intensively in developing both an appropriate definition and an accompanying framework for the new reference rate. The Riksbank will develop a quality-assured reference rate that, where applicable, is in line with international principles.
Are there any regulations or principles concerning reference rates of this type and their administrators?
In 2013, the international organisation for the oversight of securities, IOSCO, published 19 principles for financial reference values, 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 for the form of the administrator’s internal oversight. The central banks already supplying reference rates have chosen to comply with and assess themselves against the IOSCO principles. The Riksbank also intends to, where applicable, comply with,, , and evaluate itself against the principles. In addition to this, the Riksbank intends to ensure that relevant stakeholders are given the opportunity, through an established channel, to form an advisory function to the Riksbank as administrator, similar to what other central banks have established.
The Benchmarks Regulation entered into force in the EU in 2018. This regulation imposes requirements both on the banks who contribute input data and on the administrators who calculate and publish a reference rate based on the contributed input data. In cases where a central bank is administrator of a reference rate, the central bank is explicitly exempt from the Benchmarks Regulation. Instead, the central banks presently supplying reference rates have chosen to comply and evaluate themselves in accordance with the previously mentioned IOSCO principles.
How does a transaction-based rate relate to the present reference rate, STIBOR?
Once the Riksbank starts to calculate and publish the new reference rate, it will, to begin with, be complementing STIBOR. The Riksbank’s new reference rate corresponds most closely to STIBOR’s shortest rate that has the maturity next banking day to the day after (tomorrow/next). An important difference is that the STIBOR rates are still calculated based on the banks’ offers, which, when there are no transactions, consist of the banks’ judgements. However, the banks are obliged to lend their respective bid rates to other banks in the STIBOR panel if a request for a loan arises. In contrast, the Riksbank’s new reference rate will only be calculated based on actual transactions. .
Will STIBOR continue to exist as a reference rate?
In Sweden, no decisions have been taken to stop publishing STIBOR. Under the EU Benchmarks Regulation and in its capacity as a critical reference rate, STIBOR must be authorised before the end of 2021. Finansinspektionen decides whether STIBOR and its administrator fulfil the requirements of the BMR and can thereby be authorised.
In any event, it is important that Sweden follows international developments by providing a transaction-based reference rate, something that is already starting to be demanded on the international market.