All users of financial benchmarks are advised to have contingency plans for a situation where a benchmark used in financial contracts or instruments ceases to exist. There are no plans to discontinue any Nibor tenors. Nevertheless, NoRe aims to provide updated information relevant for Nibor users’ own assessments of fallback solutions.
The rationale for replacement rates
In 2013 the International Organization of Securities Commissions (IOSCO) published its “Principles for Financial Benchmarks”. The report contains recommended practices for entities involved in the provisioning of benchmarks. These principles have become standard reference for development of public regulation of financial benchmarks worldwide. The EU Benchmark Regulation (BMR) implemented the IOSCO Principles in the European Economic Area (EEA). According to the BMR supervised entities are required to have written plans setting out the actions that they would take if a benchmark used materially changes or ceases to be provided. Where feasible and appropriate, such plans shall designate one or several alternative benchmarks.
Following the ISOCO Principle 13, on transition, administrators should encourage users of their benchmarks to make sure that they have robust fallback provisions. Administrators should also have clear written policies and procedures in place, to address a possible cessation of a benchmark. These policies could include criteria to guide the selection of a credible, alternative Benchmark.
The Nibor Cessation Policy outlines the processes that NoRe will undertake if production of Nibor is ceased in its entirety or in any individual tenor. The Nibor Transition Policy outlines the steps that NoRe will take to ensure an orderly transition, either to a new benchmark administrator or to an alternative benchmark, if such a benchmark exists. NoRe’s policies are available on NoRe’s website, please see refer to the Nibor Framework” webpage.
Fallback rates for Nibor recommended by the ARR Group
After consultation with the financial industry, the Norwegian Central Bank in 2018 established the Working group on alternative Norwegian krone reference rates (the ARR Group). In September 2019, the ARR Group recommended a reformed version of the Norwegian Weighted Overnight Average rate (Nowa) as the alternative reference rate in Norwegian kroner. In December 2020, the ARR Group published the report “Recommended Market Conventions For Nowa and Fallback Solutions in the event of a cessation of Nibor”. This report was followed up in December 2021 by a guide for the use of Nowa in financial contracts and as a fallback solution.
The fallback solution recommended by the ARR Group is based on adding the Nowa («Term-adjusted Nowa») and the median of 5 years historical difference between Nowa and the individual Nibor tenor («Spread-Adjustment Factor»). The solution is an adaptation of the fallback clauses recommended by ISDA on derivatives and the ARRC for the reference rate USD Libor, and is advised applied across different markets and products.
For more information about the ARR Group and their recommended fallback rates for Nibor, please refer to information published by the Norwegian Central Bank here.
Background information for analysis and assessment
To assist users in their contingency planning, NoRe has prepared a memo on the fallback rates recommended by the ARR Group for Nibor. The memo highlights important aspects that users should be aware of when assessing the recommended fallback rates and adds graphical illustrations which show how these rates have performed in comparison with the individual Nibor tenors in a historical perspective, going back to 2016. The graphs are based on calculations made by NoRe in cooperation with GRSS – the calculation agent for Nibor – by using the methodology as recommended and published by the ARR group. The memo can be downloaded here:
Calculations of historical rates based on the above-mentioned model may be made available for analytical purposes on request – click here to make an enquiry. The data are not to be referred to in financial instruments or contracts or to measure the performance of investment funds. Neither GRRS nor NoRe are liable for any deviations to calculations made by a delegated calculation agent of fallback rates, nor to any party who use these calculations.