Transcript of Question & Answer Session Panel discussion – The End of Libor and the Impact on Australian Financial Markets

Thanks, Chris, I'm Matt from KangaNews. One question, I know at the ISDA AGM a couple of weeks ago, there was quite a lot of talk around the sort of how IBORs are embedded in wider society, and sort of borrowing it, like household borrowing and mortgages. And so how challenging would it be in the current environment to sort of inform for instance, mortgage holders, about things like retrospective rate-setting?

Well, communications is really a big part of this. I think that a lot of the focus so far, has been at the top of the food chain in terms of the major issuance, the major banks, but as I mentioned in my quip at the beginning, we also in the public sector, need to do a better job to use all our resources to get the message out. I think that the major financial institutions understand this, but it does need to be driven down deeper and deeper into the real economy. Certainly, in the United States, we haven't done a good enough job of getting the message out beyond the major Wall Street banks, to mortgage lenders, some of which are regional, smaller banks, community banks, other lenders. There is a lot more work to be done there, but we're doing the work.

We are also to some degree, relying though, on all of you, to get the message out to customers, and to start making the transition. So communication … and you know what? I've asked, for your questions, I'd like to ask a question here. For your community here in Australia, what are the biggest impediments to the transition? What can we do in the public sector, to make your job easier? Because this is a big transition, but I think for all the reasons I said and that Andrew said, we just can't ignore the structural fragility in going forward with LIBOR. We have to make the transition, we have to do it together. So you need to tell us what the impediments are, so if there's anything we can do, we can make that happen and communication is certainly one of them, and it's one that we're aware of.

Thank you, Chris. I just wanted to ask one thing. How has been the feedback of US banks, and how has been the acceptance of SOFR, or are there still waiting for a better rate to emerge, be it forward looking or backward looking?

Yeah. So, it's a little bit of a chicken and egg thing, right? And as I mentioned, liquidity begets liquidity, so how do you build that liquidity? The good news is, the take-up on SOFR futures has been remarkable. The exchanges measure the take-up of new products, the take-up of SOFR futures has been one of the most successful product launches that's ever happened at the Chicago Mercantile Exchange. So it's been a remarkable take-up. Yet at the same time, it's still in the beginning stages. We still need to build that up, but I think the build-up of liquidity in that instrument, it's part of that chicken and egg. It's one of the vital elements of SOFR taking off as a cash product, and to build a term structure.

And so, we've been very pleased with the early developments, and our exchanges, I think have been very responsible in working with us on this, and ICE now has a product as well. So we're seeing liquidity developing in two competing products, which is healthy for a market. So I think we're encouraged by that, but there's still a lot of work to do, but it really comes with a lot of new issue. We need firms looking at new issue in SOFR on the sell side, as opposed to going forward with more issuance of LIBOR-based product.

You talked a bit about the term structure, and have you looked at the alternatives that might come out in terms of a term structure, in terms of getting 3-month and 6-month term structure, and do you have any problem with it being a derivative on a derivative, so it being a derivative of SOFR itself?

I guess the short answer is no, we don't have a problem with that. What we do you want though to develop is simple structures, not complex structures. And so, I think we'll have to see how that happens. There's going to be an element to the development of this that is going to be organic, that is going to be how the market follows. I think as the public sector, we have a principled approach to this. We'd like to see simple structures, we'd like to see take-up, we want to see the movement away. We may have views on how some of those work, but we also I think, are sanguine enough to understand, there's going to be some developments of this that are going to be driven by market demand, and we're not going to control every element of how it evolves. So, our primary goal is a movement away from LIBOR. And then how those term structures develop we'll have some input into, but the market is ultimately going to determine what works for the market.

Commissioner Giancarlo, thank you very much for your time and for your comments.

My pleasure.

I know you have to rush away now, but thank you so much.

Thank you very much. Have a great conference. Good to see you.

My name is Helen Lofthouse from the ASX. Thank you for the opportunity to ask more questions, and Cathie, Guy, and Andrew, thank you for staying to take part in the panel. I guess the first question is: we've talked a lot about LIBOR, but how much of a problem is this really for Australia? Guy, perhaps I can pass that over to you to start there.

Yeah, I mean one thing we'll get a direct answer to that is when we get these answers to Cathie's letters, but partly to what Chris was saying earlier though, as best as we can tell to date, what we don't have is quite the same problem that the question earlier alluded to, which is a lot of products which reference LIBOR outside the wholesale market. That isn't a problem that we have, so it's mostly confined to the wholesale market. Mostly it's around issuance. A lot of our corporates issuing in US dollars, are by and large going to reference LIBOR. Our banks, certainly their issuance offshore is almost entirely to date, sorry, up until very recently, issued and referenced LIBOR. Those to some extent are reasonably easy to address, relatively easy to address. The more problematic one probably, and the longest legacy one, will be the cross-currency swaps. Nearly all of them will reference LIBOR today, and some of them have a very long horizon.

The final element though, is on the asset management side. Australian asset managers have 70% of their money offshore, a decently large chunk of that will be in a product which references LIBOR, and then they hedge a very large chunk of that, and that almost certainly will be using a hedge which references LIBOR. In those products outside the hedges though, mostly we're just a user of the product. So there's some issuance, but by and large, the changes will be done by the person who has issued that product, not by the asset management community here. They'll have to change possibly their systems, and one should never underestimate system changes, but I think the biggest challenge really for us, is going to be around, I think probably around the cross-currency swap market, in terms of a market which is going to have a long legacy tail.

Yes, and so obviously, BBSW is a dominant benchmark that's used here in Australia. So what about the future of BBSW, and how does that compare to LIBOR?

So this is the particular challenge we have in this market, which is, while Andrew is telling rightly, everyone that LIBOR is about to finish, we go around say, "Yes, that's right, but BBSW isn't." And the difference is actually fundamental, and directly related to what Andrew and Chris were both saying, is that it's the transactions which underpin the market. The transactions which underpin BBSW are meaningful in a way which generates proper price discovery, and which is a direct contrast to LIBOR. The BBSW market is orders of magnitude larger than the LIBOR issuance market. Go figure.

We are confident that BBSW for the foreseeable future, will continue to be a robust benchmark. And so, which to some extent makes a transition a little easier, is that we are not saying that people need to transition away from BBSW. You should ask the question as to whether BBSW is the appropriate benchmark for the product you're using, because one point, before I finish, I'd like to highlight is, most people wrote LIBOR into their contracts without actually thinking about it. And it was just, it was there, so I'll use it, whether it's the appropriate benchmark or not, by and large didn't figure into people's calculations.

I think that's probably true of BBSW as well. Most issuance here references BBSW, whether it's exactly fit for purpose or not and so while BBSW is likely to continue for the foreseeable future, that still doesn't mean that it might be sensible to ask the question, as whether it's actually the right reference rate to be using.

Yes. So although we have a healthy BBSW, there's clearly still a lot of work to do in Australia on LIBOR. So Cathie, maybe I'll direct to you. Can you give people a sense of where to start with that …?

Because as a regulator, we'd be so fabulous at it? Absolutely key, the things we've asked firms to do is to assess their use of LIBOR in key contracts, and obviously cross-currency swap is an obvious one, but also to assess the use of LIBOR in, if you like, the plumbing of their businesses. So, how much of the internal systems depend on the use of LIBOR, and to really try and come to grips with that as well. I, like Guy, am a little bit worried that we might be being complacent, because we've got BBSW, and we've worked so hard on the methodology for BBSW over the last couple of years, that we're sort of maybe losing sight. And also, I'm really concerned about whether people are ready to negotiate contracts with appropriate fallbacks to LIBOR, and have got that happening. So every day from now on, and are going back and looking at those longer-dated contracts, and having the conversations now about putting in the fallbacks in the contracts. I think to me, that we know that redocumenting is always a big issue, and it takes a lot of time and energy, and I just worry that we underestimate that.

So, you're worried really, that some people might be taking a bit of a wait-and-see approach?

Yes.

And so what are the risks of that you'd highlight for people?

You will lose control of the situation. I mean, inevitably as you get closer to a period of time where LIBOR goes out of use, the dynamics of the market change, and you don't want to absolutely have to reopen negotiations more broadly on the commercial aspects of the contract, so much better to deal with sort of something that hopefully is a mechanical issue earlier on, than leaving it to the last minute.

So clearly, something that needs a lot of focus from all of us here at the moment. Andrew, you talked about the Dear CEO letters that you sent in the UK. Can you give us a sense of what the FCA learned from that process? What were the key messages coming through?

We learned a great deal, actually. I think first of all, we learned a lot about obviously, so it goes to Cathie's point about the degree of preparedness across each institution. And as Chris was saying, this is not just banks, by the way, obviously because the LIBOR usage goes well beyond that. So the degree of preparedness for this, how much frankly, thought and planning was going into it across the institutions, and let's face it, the answer we got back is, "It's variable." So that has given us the basis to then follow that up. I think it has raised the whole issue within the sort of consciousness, particularly in the sort of the governance framework within firms, which is what we set out to do. And also, we've learned a lot from it, because out of that as Cathie, Guy, and Chris were all saying, you know, you start to unearth the issues that need to be tackled. So if I can just sort of build on what Cathie was saying a moment ago, by doing this, you'll get to the bottom of how much banks and other firms are using LIBOR, not only in terms of pricing contracts, but in terms of their internal systems.

You'll also get to a point, Chris was referring to the meeting we had in Washington about a month ago. You will also get to the questions of, to what extent are there any tax issues in there, to what extent are there accounting issues in there, I mentioned hedge accounting as one example of that. And unfortunately, the devil's always in the detail with this stuff. So that was the explicit sort of in a sense, reason for doing it, and so far, we're pleased with the way it's gone in terms of raising the levels of awareness, and unearthing issues that need to be addressed.

And I'm curious, did you find in that process that there were some firms that had a sort of best in class approach that you were able to then share with others …?

Well, I think two things. I think on that, first of all, I think we found things that different firms were doing where you can say, that's good practise. It would be sensible for the industry as a whole to in a sense, see that bit of practise, and that's by no means unique to one firm. The second thing is, yeah, I'm not going to name names, but some people were being quite complacent about it. Some weren't. I think there is a view that in some quarters, actually not very many now. It's going down, that somehow sort of LIBOR will just continue if we sort of put our heads down, it will go on. That is declining, and that is why I strongly endorse what Chris was saying about sort of outreach, as it were. So it's declining, but we do come across that. Yeah, so that was another reason for doing it.

Yes. And you touched on some of those issues around accounting treatments and tax treatments. What's been done to address those kinds of issues?

So we've got something that … Chris mentioned the FSB group, the OSSG which I coach with John Williams the president of the New York Fed. So we've got work streams within the OSSG, addressing tax and accounting issues. But to be honest with you, we need firms to bring them to us. It's not stuff that we will necessarily immediate identify ourselves. In the spirit, as Chris was saying, of the outreach through the ARRC, through the UK market committee, our answer is please bring them to us. One of the really interesting and encouraging things about that meeting in Washington, Chris alluded to the fact that the US Treasury was present and it was very encouraging that we had the US Treasury saying and the US context, "Look just please bring us the tax issues. We'll help you." I don't think help in the sense of giving money away by the way, but help in the sense of technically if there were issues that need addressing. Let's get them out on the table.

Yes. Cathie, is the message the same in Australia? If there are those types of issues out there where should people be bringing them to?

We'd be very happy, part of the exercise is, please bring them to us. Bring them to APRA or the RBA as well, but as a financial regulatory community, we're very happy to engage with those sorts of issues, to discuss them, and then talk to other parties whether it's the Accounting Standards Board or the Tax Office, and just get to the bottom of some of those issues. I'm absolutely happy to do what we can there. We might not have all the fabulous answers but we'll do our best to try and address them.

Right. The Dear CEO letters that you've just sent out, so I guess they're partly about seeking people's status but also for surfacing those issues …?

Exactly. It's about actually having the conversations and we've been deliberate about ensuring that we put publicly on our website the broad context of the questions and concerns, because we realise we won't have necessarily identified all the organisations that might have an issue and we need to make that much more broadly available for people to think about and to come to us.

I guess it's probably early days for you to have any feedback yet …?

It's really early days because we weren't quite as efficient as the FCA. We've only sent out the letters last Thursday so we'd be very impressed if someone with such a great project that their able to answer our letter straight away. But it is early days, yes.

We'll wait with interest to hear more about that. I wanted to move on to the subject of pre-cessation triggers. I had to practise a bit to even say that. There's been some discussion about incorporating pre-cessation triggers into the work on contractual fallbacks for LIBOR. What are these pre-cessation triggers and why might they be needed?

If I start boring you on the subject of the European Union benchmark regulation, please shut me up. Benchmark regulation has in it this, and I referred to earlier, this question that any benchmark needs to be representative. And obviously, the FCA, we are the regulation authority with respect to LIBOR. We do have to reach judgement on that question. It hasn't been done before because the benchmark regulation is new. It's only been in for a couple of years. It's a fairly complicated process, and I'm afraid it's sort of a slightly metaphysical question because of course, what is LIBOR representative of? As Chris and I were saying, the market has declined to the point in some areas of nonexistence.

We are doing a lot of work at the FCA on how to frame the question frankly because it's never been done before, and that's important. My view is we're going to have to be very transparent about this because the markets needs to know how we will go about judging that. I would, again, it's one of the issues that we need to nail down in the next, the remainder of this year actually as to how we will go about approaching that question. I would imagine there will be a lot of legal judgement around that because, as I said, it's never been done before.

Now just to be clear, however, what does that mean? There's a question, as you rightly say, about whether ISDA will incorporate that trigger into that structure in close discussion with … I think it would make sense frankly to do that but doesn't answer the question of what the trigger actually is and how it works. Now to be clear, if the trigger is used it doesn't mean that LIBOR just dies instantly. It would have the effect of preventing new issuance eventually of using LIBOR, but it would leave open the question of how to deal with the legacy.

Now, coming back to what Guy said a few minutes ago, in one sense of course, you can approach the LIBOR issue and say "Well, look, here's the easy way of dealing with it." You stop new issuance and run off the legacy. The problem, as Guy said, is the legacy is very long. It's decades in some cases with some contracts.

Centuries.

You've got some centuries, have you?

No, I thought you had … [Laughter]

It is not feasible to think that you could bandage LIBOR up and keep it going for such a substantial period of time and legacy. We just don't think that's feasible. It comes back to the point to I made, in my opening remarks, about how we deal with the difficult legacy. And if I could very finally make one point, the question that you asked about mortgage rates is very interesting there because as I said in my remarks, some countries have it more than others, and of course, you've got very long term contracts then often. I think, if I could just make one final point there, of course, when it comes to dealing with those sorts of contracts, there is going to have to be a key question about what is, I might call it a fair substitution and how can you judge the substitute structure, whatever it might be, is fair for both sides to the contract. That is a very hard question, I don't want to take away from it.

Right. Just to be clear on the pre-cessation triggers, for example, the FCA would determine perhaps that at a certain point a particular form of LIBOR was no longer representative of the market that it was purporting to represent, and would therefore officially say so, at which point that benchmark would no longer be an authorised EU benchmark? Is that …

That's correct. Yes. You have to go for price as well. We don't sort of wake up one morning and decided about that but it's quite a long process. But that's the case, and by the way, I think we would have to do it LIBOR contract, by LIBOR contract …

Right.

We wouldn't do it across the board because as Chris said, the depth of LIBOR is very different even today. It's not great in any area, but it's negligible in some areas and a bit more in others.

And then that trigger could cause it to therefore no longer be an approved EU benchmark hence why it wouldn't be able to be used for new products; but that as you say doesn't address the legacy.

Perhaps I'll turn to that legacy question and talk a bit about the contractual fallbacks. I know several of you have highlighted the good work that ISDA have been doing focused on the derivatives population, and I think that people are probably aware of that, so maybe we'll focus in on the cash products. Guy, do you want to maybe comment on what the path might be for determining fallbacks for cash products and actually achieving that?

I think one reasonable path is to use what ISDA is coming up with. ISDA is sorting this out for the derivatives market but arguably that provides you at least a reasonable starting point to how you'd want your fallbacks to work on any cash product. The solutions they're coming up with in terms of what the fallback is in the derivatives market I think are reasonably transferable to other markets. To some extent they're doing the work for you. I think the problem potentially is going to be is the one Andrew referred to is that on the day that you make this transfer or if you have to negotiate the contract, you don't want to wait until the last minute for exactly the reasons that Cathie said. Because on that day, it is very clear that one of the parties is going to be worse off and one of the parties is going to be better off and you're not going to agree. If you agree in principle now, ahead of time, as to what a reasonable fallback is, I think there is a reasonable chance that you could come up with a sensible fallback.

The time to do that is now and not wait until the day where everyone can go through contract by contract and work out whether they're worse off or better off and only agree on the fallback when they're better off and refuse when they're worse off and we're in the wonderful world of wholesale contract frustration. That's why I think it's sensible to try and work out what these fallbacks are now, in general. Again, from the wholesale market point of view, I actually don't think that's too challenging an exercise and by and large, that's the space we've got to deal with here in Australia. Luckily, probably by accident than by design, we don't have too much retail, if any actually, retail exposure to worry about here. Your issue is going to be when you're dealing with renegotiating mortgage contracts at retail level. That's not something, by and large, we have to worry about here.

Right. We've talked about fallbacks for LIBOR and the certainty that LIBOR will be going at some point in the not too distant future. What about fallbacks for BBSW?

The same.

Yeah. And ISDA has done the survey and doing the drafting so why wouldn't you look to include those fallbacks in your contacts.

Absolutely. So the same message …

I think, what LIBOR shows, is potentially these benchmarks are going to disappear and, by and large, the fallbacks didn't envisage this happening. Now it's clear this can actually happen. You probably know this but the fallback mostly for LIBOR and the same is true for BBSW, is "Ring one of the submitting banks and ask them what the rate is." Well, they've already just told you that they're not going to tell you what the answer to that question is. That's why the benchmark doesn't exist anymore. So that fallback is not robust even in the practical sense, let alone the legal sense. What this has done is actually highlight this fragility and that fragility needs to be addressed.

And so the message really is that the fallbacks work needs to be done comprehensively across the board.

Absolutely. In the rules for BBSW, we do have the end of the world sort of forcing outcomes but I'd think everyone, including the regulators who'd have to impose that, much prefer that there would be a market practise of having adopted fallbacks that reflect how everybody's comfortable operating if the benchmark did run into difficulties.

Yes. Indeed.

The other thing, if I could just come back to the point I made earlier, see I do think that if I look at the UK situation with Sterling, the alternative rate SONIA is keyed off the Bank of England's official rate, effectively, it's the overnight rate. That makes a whole lot more sense as sort of the anchor. To Guy's point, nobody thought about is LIBOR going to go away one day. They assumed it would always be here and then it got used for all sort of purposes. I think it is much more sustainable to key it off something that has a link back to the official policy rate that is being set in the currency.

Guy, what are your thoughts on that in Australia? Because although BBSW continues, you can make the same argument, I guess.

We provide a risk-free rate. We, the Reserve Bank, provide a risk-free rate, we publish it every day. It's there to be used. It isn't being used very much at all, but it is there to be used. It is a risk-free rate. A risk-free rate is not fit for every single purpose, but we would be very pleased to see further development around that. More issuance referencing the risk-free rate rather than BBSW, if it's the right rate to use. As Chris said earlier, and I think Andrew alluded to earlier, it is a bit of chicken and egg problem, people won't use it because it isn't there, and it isn't there because people won't use it. There are some initiatives out there to try to get more of the issues out there and we would actively encourage it and once the usage starts, then the hedging starts, and the derivative products start. The UK is a particularly good example. In basically 12 months the market has really taken off. We've had two Australian banks issue SONIA-linked product over the past six, nine months, so it's now a larger market than the credit based market.

Last week, 77% of interest rate trading was in SONIA in Sterling.

Which is just great progress.

It's terrific. To be honest with you, it was ahead of my expectations.

I think it's about time for us to take questions from the room if there are further questions for our panellists?

Good evening. Bo Seo from the Australian Financial Review. Just a question for Dr Debelle. Dr Debelle, do you agree with the market's inference that the RBA will be forced to cut rates?

While we're talking about one reference rate, we're not talking about the other reference rate. I'm really here to talk about this particular issue.

You're not going to comment on …

No, not now. It's very rare that we have the opportunity to ask someone like Andrew about an issue which is absolutely central to the functioning of financial markets. So I think I'd rather take the opportunity to ask questions on that.

Hi. This is a little bit weak of me not to have done this question to Chris while he was still here but we completely agree that the SONIA evolution has been fast and is working well and we're very supportive of it but as an Australian issue, we do get the opportunity to meet with lots of global investors and obviously the investment banks. I think we're being a little troubled by the lack of, I'd certainly say, consistency of commitment but even awareness, particularly with investors in the US around the evolution of LIBOR and this point around denial is really big. When you think about what is the thing that certainly Chris can do to help us help the market. Definitely the investor piece of this is really important, and there're really big organisations. So, they're on the ARRC committee. So it's sort of interesting, that sort of lack of broader acceptance and, you know, we've done extensive polling on this, so I feel fairly confident to say there is quite of lot of inconsistency around the acceptance of a lot of the points you've been making, which, you know, we very much support and agree with.

Well, let me say, I can't speak, obviously, for the US, in that sense, but let me say two things, first of all, because I must say, it's easy for me to talk about the UK and SONIA, it's a smaller market, it's a relatively small market. We're pleased with the way it's gone, but we realised that we're dealing with a smaller challenge. I think the second thing I'd do is just repeat what Chris said. I think you heard a very strong view from Chris, and I know this from many conversations with Chris, that he is very strong of the view, and it's not one that I think others don't hold, that a lot more needs to be done. He talked about getting out around the country and explaining what's going on and I strongly agree with Chris on that. You have to do the hard work to explain it. I think if probably Chris was still here, he would say that and agree with you on that point.

Question for either Andrew or Guy, we haven't heard anything about secured versus unsecured rates. This with the US going down the secured route, do you have any concerns about that difference that might create for cross-currency swaps and so on down the track?

It's an interesting question. Does it make a difference? In this process, of what I called earlier on, what I call repatriating interest rates, I think, that in doing that, different countries and different authorities will make different choices, and so as you rightly say, if you take the UK versus US, an unsecured rate in the UK, you got a secured rate in the US. Those were very conscious choices. I have to say, based on experience so far, I don't think that's a critical factor, but I think it's one that I can safely predict, I think there will be a lot of academic work done on it. And I think it's something that, yeah, we need to keep a close eye on.

Yeah, I think it's interesting. A bigger challenge versus secured and unsecured, I think is credit versus risk free. Again, if I think about cross-currency swaps, if Australian banks are issuing in the US, and they're issuing on a SOFR or issuing in the UK for that matter, and issuing on SONIA, and then issuing BBSW back here, then in the cross-currency swap, you've got the credit risk in there as well. Market participants are paid a lot of money to sort out these problems. It's not inconceivable that someone can actually sort that one out. I think it's an interesting challenge, I think it's an interesting thing for us to think about here if the market moves to a risk-free based issuance for financials. Or corporates, for that matter, offshore, what that implies about the future development of the market here.

To Andrew's point, I think the difference between secured and unsecured, I'm not so sure that's so first order, as the difference between about having credit on one leg and risk-free rates on the other one. I think that's going to be an interesting one, and to some extent, there probably more interesting in terms of solving the legacy issue rather than the future issuance issue. I think in the end … I think the other area to think about, whether you end up with a fixed or floating as well, is another thing to think about going forward. I do think, as I said from our point of view, the bigger issue potentially, is going to be the risk-free rate on one leg and the credit rate on the other. How is that going to go?

And I think one thing, and I've picked this up in a lot of conversations in the US that will … I mean, it is attracting, obviously, a lot of attention is when you choose secured rates, if you get spikes in period ends, quarter ends, in that secured rate, which are a function of the structure of the repo markets, then that will, and that's going to become your benchmark then, that is a point of attention. It is getting a lot of attention in the US, in terms of the dynamics of the markets and how that's coming about.

Another issue, which I think if I don't say this, someone will probably ask the question and it's related to this is, you don't have a long history here of these rates to know how exactly they're going to go and I think that creates some concern. That said, when LIBOR started, you didn't have a long history either and eventually it evolved. But I suppose the market now is so many orders of magnitude larger now, than it was then. But I think that is another concern, there's a large supply of collateral out there for a repo rate at the moment in the US. What if you get to a world, which we've experience here, where that isn't the case? How does that go? Not obviously in sight in the US any time soon, but nevertheless, at least conceivable.

You've also got issues around there's quarter end issue, there's also around regulatory treatment, as to whether you use moving averages to assess things like leverage ratios or not.

Great, and I'm just going to pick up another audience question.

Had a question on the development of forward-looking term risk-free rates, where the message coming from the FCA seems to be more negative than the message coming out of ARRC, for instance, maybe incorrectly …

I'm sorry, I didn't quite catch that.

The development of a forward-looking term risk-free rate.

Yeah.

But, the message coming out of the EU and the FCA seems to be a bit more negative on the prospects and, in fact, desirability on developing such a benchmark. I was wondering if could comment on that and also … To the extent that …

What I actually think I said anyway was, look this debate has to happen this year. Chris said the same thing as well. We need to get past this debate and, frankly, when I say we, our market committees and we as authorities need to have this. I certainly started the thing open-minded about this as to how you could structure it and what is required and whether you rely on backward-looking or forward-looking, and as Chris said, then and Guy said, now do you develop the forward-looking, given a chicken and egg issue. I don't want you to come away thinking of the FCA as negative about that. Frankly, I am in spirit of let's have a very open debate about this and conclude it, but can we please conclude it, I would say this year. And move ahead, because we've got to put in place whatever infrastructure has to continue to develop as a consequence of that, and then we have to, as I was saying, do all we can then to use that to solve the – not only to move the market on in terms of the future issuance but also to solve the legacy.

Yeah, and I think the other issue to note is, the aim of this is not to replace one fragile benchmark with another fragile benchmark. You want to make sure that the market should it develop and it would be good if it did, but you also want to make sure that it is also sufficiently robust and you haven't got another market, which is subject to the same issues that LIBOR was subject to.

I'm conscious of time, just checking if we got any other burning questions before we wrap up?

Yeah, we do.

We do. Okay.

I had a question for Mr Bailey, thank you for joining us here today, sir. Am I right in understanding from your speeches that this concept of un-representiveness of LIBOR in the context of the pre-cessation triggers is defined by the number of banks submitting a rate, as your speeches seem to suggest? My second question related to that is whether Brexit may have an impact, whether you can at all comment on it, if Brexit might have an impact on that pre-cessation legal environment at all. Given that it's the BMR.

So, the number of banks submitting is one part of the framework of the test, as we see it. So, we're going to do the work to set out in more detail how we interpret the test, because it's never been done, as I said earlier. But it's not the only part, because clearly, you could be left either different constituencies of banks would look rather different, and to be frank, I'm trying to be nice about this, now. In terms of robustness of the thing going forward. It's not by any means the only test, but it clearly is one of them. By the way, there isn't a number in there, in the regulation, where it says, well when you get down to this number, it's kaput. It's over. It's not that simple, so that's what we've got to interpret.

On Brexit, my natural reaction is rather like the first question to Guy. I've come to Australia to get away from Brexit, but never mind, it follows you. Actually, this is one of the simpler questions. One of the very simple questions to answer on Brexit, in one sense in the UK, what we have done in preparation for Brexit is, to use a terrible … turn a word into a verb, ‘on-shored’ EU legislation into UK legislation, and that includes the benchmark regulation. As things stand, if we leave the EU on that basis, we will have a mirror set of EU regulation. We will have the benchmark regulation and UK regulation on day one. That's what we would therefore put into effect. In that sense, Brexit's not an issue.

So a short last burning question, if we could. Thank you.

I'm struggling to see for the corporate debt market how we survive in a world without LIBOR. I can think about the ISDA side of things and the bilateral agreements, it's a relatively sort of standardised way of approaching it and agreeing with the counterparties. On the corporate debt side, there's not a bilateral issue, this is, thousands of different bonds, with different bond documentation and investors. To me, it seems like an impossibility to put fall-back language into all these different bond agreements. How do you foresee that part of market surviving in a world where LIBOR doesn't exist?

Do you mean go forward, so in terms of the legacy?

Legacy products.

I was going to say, because going forward, I think my strong advice would be to put fallbacks in place.

No problem with that.

It sort of goes back to the point Guy made earlier. That it was an assumption LIBOR would be around forever. That it probably doesn't look great that there's no fallbacks in these contracts. But we recognise there are contracts out there which have exactly the characteristics you describe, which is why I made the point that, earlier on if you don't mind me saying so, that we want to try and narrow this down as far as possible and give as many options as possible for what I might call voluntary conversion in the cash market, so that we can narrow it down to what I call the difficult legacy and then work out how people think a difficult legacy is. My starting assumption is we've got to try and press down on the difficult legacy as much as possible to try and solve it without getting to this sort of more difficult scenario first.

You're right to highlight this, and it's exactly why we want this sort of close contact with the market, to say can we please work out how big this is and what characteristics it has and how truly intractable is it at the end of the day.

Thank you very much indeed, Cathie, perhaps I could ask you to just, if there's one message you want everyone to walk out of this room with, what is that message?

Get going. This is happening, this is coming. Please, get on the job, if you're not already looking at this and use us, what can we help you with? What are the things that might be issues? What solutions could we help facilitate? Who do you need to talk to? Do you need to talk to an Andrew? Can we help facilitate that sort of interaction? Let us know.

And the other one thing is, when you're talking about Australian interest rates, just so you know, including the overnight index rate, the European Commission has issued a draft determination and it looks like they'll give equivalence to our regulatory regime under the EU benchmark regime, which is a great story for us. I think it's for the Australian rate and the Singaporean rates. So, have a great deal of confidence in using the rates that operate here in Australia.

Thank you very much indeed, to all of our panellists.