Transcript of Question & Answer Session Interest Rate Benchmark Reform

If that message wasn't clear, then you're going to have to put your phones down, because it was a very clear set of priorities and objectives that you set out.

But let me ask you one question. What do you make of the progress the industry has made thus far in your conversations with either regulators or market participants in terms of readiness and observations? You've laid out what needs to happen, what's your level of confidence and comfort that those things are being accomplished right now?

Not that high, I would say. On the regulatory side, there's a very clear recognition of what needs to be accomplished. We're seeing quite a bit of progress on the alternative risk-free rates, particularly over the last few months. I mentioned what's happened in the US market with SOFR starting to be published, so that's happening. I think there's very much a recognition on the banks' side that something needs to change, because they are the ones themselves who may not be willing to submit LIBOR going forward.

I suppose, and without trying to be too unfair, I think there's not so much of a recognition on the buy side of the market or other uses of LIBOR. As I said, I think there's a bit of a hope that someone will come along and fix this problem for them and then it might all go away, and I just don't think you can be confident that's going to happen. It may happen. I'm not saying it's guaranteed that LIBOR is going to disappear in 2021, but I would certainly not be assuming that it won't.

I do recognise that it's a hell of a lot of systems work and legal work involved in this, and that again, as I said, is why Andrew put people on notice last year; try and give them enough time to adjust to this potential state of affairs. But, as I said, assuming that this problem is all going to go away or that someone else is going to sort it out for you is probably not going to be a sensible strategy.

Well put. You did mention, and you've just articulated again that steps have been taken to make LIBOR more robust, and as this is a voluntary effort, there are people... you know, it's up to them to take this action. If there is a possibility of LIBOR existing post 2021, what do you think needs to happen to LIBOR in terms of maturities or tenors reducing it that might make it more acceptable or more robust going forward, if at all?

I suppose it's not clear to me that we're going to end up in a world where there's going to be enough transactions. I don't see that. I wouldn't be counting on that coming back, and so therefore it really boils down to whether the banks, which currently submit to LIBOR, are going to be willing to do so going forward, and I just don't have any great sense as to whether or not they're going to be.

I suppose what I would encourage is the work that you're doing at ISDA. If you're not confident, at the very least you should have fall back provisions which are actually going to work in the contracts, and that's very much the work that we're encouraging ISDA to do with the industry so that maybe LIBOR does exist. But I want to be confident if there are some chance that actually it doesn't exist, then I've got fall back provisions which are actually going to make sense. Whereas if I look at a number of the ones which are out there at the moment, if LIBOR's not working, they're not going to work either, and so, as I said, that's very much the motivation for the work that you're doing at ISDA.

Thank you. I want to remind all our participants in the audience, you do have the ability to send questions to the Deputy Governor. I have the computer up here that I'm happy to read off your questions to him, but I've got a few of my own in the bag here, so please send them up.

You mentioned that Australia is actually one of the few jurisdictions with a legislative solution moving forward. Europe, the European Commission has also implemented legislative standards. The fact that the US, for example, has not taken steps to establish a benchmark initiative or reform, does that trouble you at all?

No. I mean, in the end, they do what they do and all the rest of us have to adjust to that. As I said, I think what is encouraging, though, is the development of the risk-free benchmark in the US. That's been resolved. It's now out there. They have the group that Sandie O'Connor from JP is leading, developing around benchmark rates is getting stuff done, so that actually does encourage me.

It's not obvious to me that all jurisdictions need a legislated solution. Our issue here was we had no legislation at all around benchmarks previously really, and we do now, so to some extent was rectifying that deficiency in our market. It's not obvious to me that you need to do that in the US market. What I think is a more encouraging development is the fact that we now have a risk-free rate up and running and even some decent sign of a terms structure for that risk-free rate in the process of being developed.

Here's a question from the audience, a very good question, in fact. Has the RBA and/or ASIC engaged ESMA and the Commission on seeking recognition for BBSW?

Yes, is the short answer to that question. Yes, we have. ASIC is very much engaged on that in getting … And in part, now that the legislation is actually in place, it is legislation which we expect should be recognised by ESMA as being an equivalent regime. So they had recognised the previous methodology we had around BBSW, but with the new benchmark legislation kicking in, I think on the 1st of January this year, ASIC is engaged with them in getting the fact that we have the legislation actually in place getting that equivalency regime recognised.

Fantastic. There are a lot of... I raised it in my remarks establishing clearing, establishing futures markets around some of these new rates in order to give market participants all the tools that they would need to voluntarily transition and have great reference prices on different structures over different terms, even though it's moving to risk-free rates. Is there anything that regulators can be doing to help facilitate that transition, to accelerate that process, engaging with market infrastructures, clearing, CCPs, et cetera, on kind of a more holistic basis to move that discussion along?

I think they are engaging. That's my sense. You can put that question to the next speaker as well. We engage with those various parts of the infrastructure here in our local market. I also think it's a … and it has been a little bit of chicken and egg problem that I won't start using a risk-free rate until the term rate's there, but the term rate won't be there until I start actually using it. But I do think there are a number of people that are sufficiently incentivised to get that market up and running, not least of which being the banks, and you are actually starting to see that market develop.

I do also think that once that market does, as it starts to develop, I think you think more and more, and you can be guaranteed of liquidity in the various other parts of the infrastructure that you mentioned around it, then I think the migration path will be much more smooth for other market participants. So once it reaches enough critical mass, and I think the indications there are actually reasonably positive, then I think it becomes self-reinforcing.

Okay. Apparently, we also have a microphone out there, so if you don't want to type in your question, you're more than welcome to raise your hand and we will send you a microphone around.

What about the relationship between the buy side and sell side? When you made the comment chicken or egg, that really epitomises that relationship and trying to figure out … I think the banks are keenly aware, more keenly aware of what's going on. They participated in the various risk-free rate working groups in the public and private sector. Only more recently have end users, buy side, insurance, asset management participated in these broader remits. Can you reflect on where the buy side at large is thinking, how they're thinking about it, and the level of their readiness?

Yeah. I think the banks sort of got there first because, to some extent, they were directly involved in the process, in the benchmark setting process. They directly fined, as a result in some cases of being involved in that benchmark setting process, so that tended to concentrate their minds on the longevity of LIBOR. But for other market participants, I suppose it's still there so why do I need to worry?

I think, as I said, it's really just a question of getting the message out there at forums like this, and I think the fact that Andrew made that speech last year really does set a timeframe, so it's not some indefinite point in the future; you can actually point to a time where beyond that you can't be assured that things are going to continue as they are.

I think, up until recently, there was a presumption that something — I don't know what that something was going to be — that something would come along and sort all this out and I just wouldn't have to worry about it. I think the message which we're trying to get out there now is there isn't obviously a something which is going to come along and sort it out and it's really just a question of getting that into people's heads.

I think now also that there's a clear alternative, rather than a hypothetical alternative, makes it easier for people to consider how they're going to transition away from LIBOR. In the past, up until fairly recently, it was this hypothetical thing that they were going to transition to. Now you can actually point to something which is actually there.

One of the things we've picked up in our survey is it goes even a step lower kind of into some retail products, and ISDA were quite lucky because we do have the legal flexibility around protocols to make the adjustments to support the fall-back efforts and to amend contracts broadly. Now, other contracts do not have the flexibility in their contracts.

Now, you noted, accurately, of course, that many of these contracts roll off in a short period of time, so hopefully the maturities will phase out, but what do we do in the case that we may have some very long dated, potentially some retail products referencing LIBOR that don't have the flexibility to easily amend through protocols, like the derivatives market? What do you recommend, or how do regulators think about some of those products?

I suppose that's still one of the remaining challenges and that's why the work is ongoing, because I don't think, as of this stage, there's an obvious solution to that. I think that still needs work as to how that's going to play out, and it may play out slightly differently in different jurisdictions. But to some extent, I think that's a question which is yet to be resolved.

Yeah, completely agree with that.

Now we have a question from one of our audience. Submission. Here's the question: regulations now give authority to compel submissions. Will this approach yield accurate submissions? What confidence under LIBOR do you have, and the fact that you're watching it very closely and we've made it more robust, do you believe that the current LIBOR submissions are more accurate?

In the UK, and in the case of the legislation which has just come into being here in Australia, you're fairly much incentivised as the penalties for not doing it accurately are pretty high, and that's been demonstrated particularly around LIBOR. So I think, you know, as I've said, I spent a lot of time, as Scott mentioned earlier, trying to sort out some issues in the foreign exchange industry over the past few years, and the same thing applies on the interest rate benchmark front is that the odd billion dollar fine tends to focus people's minds in terms of providing their submissions on best endeavours. That sort of crystallises quite clearly the cost of not doing that.

But an important thing to note, though, on the submission front, so while it is the case that submissions can be compelled around LIBOR in the UK at the moment, as Andrew said, there's a finite life on that hence the date of 2021. There is only a finite period over which they can actually do that. And that's why we can't rely on that being the case going forward. Submissions won't be compelled post 2021.

Well, I think we've reached the end of the questions here. You've been very generous with your time and thank you for cooperating via teleconference to make this happen. Quite remarkably it all went very smoothly, given some of the challenge we face. Let me ask the audience to give Governor Debelle one last round of applause.