Credit sensitive rate

Interest rates - reference rates - benchmarks - robustness - IOSCO - LIBOR transition - Financial Conduct Authority - pricing - credit risk.

(CSR).

In the context of benchmark interest rates, credit sensitive rates are rates that are not suitable for use as benchmarks.

This is because these rates are too volatile in times of market stress, mainly as a result of the relatively small sizes of the markets from which they are derived.

Credit sensitive rates are not suitable benchmarks

"The Financial Stability Board’s report clearly states that ‘to ensure financial stability, benchmarks which are used extensively must be especially robust’, and is also reflected in the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks, specifically Principle 6 which calls for administrators to take into account the ‘relative size of the underlying market in relation to the volume of trading’.

Recently created credit sensitive rates – such as those being used in some US dollar markets – would not appear to be in compliance with the IOSCO Principles if their use became widespread.

It is the FPC’s view that such credit sensitive rates are not robust or suitable for widespread use as a benchmark, and the FPC considers these rates to have the potential to reintroduce many of the financial stability risks associated with Libor.

The FPC welcomes similar remarks made by members of the US Financial Stability Oversight Council, warning markets that widespread use of these credit sensitive benchmarks may replicate many of Libor’s shortcomings, and calling for the use of robust RFRs, as underlying volumes are unmatched by any other alternatives."

Financial Stability Report - UK Financial Policy Committee (FPC) - July 2021.

See also

• Benchmarks Regulation
• Credit adjustment spread
• Credit risk
• Fallback
• Financial Conduct Authority (FCA)
• Financial Policy Committee
• Financial Stability Board
• Financial Stability Report
• IBOR
• International Organization of Securities Commissions (IOSCO)
• ISDA spread adjustment
• Legacy
• LIBOR
• Loan Market Association (LMA)
• Principles for Financial Benchmarks (IOSCO)
• Risk-free rates (RFR)
• Risk premium
• SOFR
• SONIA
• Synthetic LIBOR
• Transition risk

Other resources

• Principles for Financial Benchmarks - IOSCO
• The end of LIBOR - Press release - Bank of England - 1 October 2024
• Financial Stability Report - UK Financial Policy Committee - July 2021
• Borrower’s Guide to the LMA’s recommended forms of facility agreement for loans referencing risk-free rates (RFRs)