Reference is made to the consultation document of 20 August 2019 circulated by Norske Finansielle Referanser AS (NoRe) on a proposed new methodology for Nibor based on the EU Benchmarks Regulation (BMR)[1]. The BMR regulation is being implemented in Norway and sets stricter and more detailed requirements for financial benchmarks than current legislation on reference rates. Norges Bank supports NoRe’s proposal in general, but submits the following comments.

Introduction

Under NoRe’s proposal, the method of determining Nibor is largely the same as set out in current Nibor rules and there is no change in the definition of Nibor. The largest change is the introduction of a so-called waterfall methodology for panel banks’ submissions to Nibor. The waterfall methodology is intended to satisfy the BMR requirements on panel banks’ determination of their contribution to the benchmark. The waterfall specifies the priority banks should give to the different input data when determining their Nibor submissions and resembles the method used for other ibor rates in recent years.

Norges Bank supports the view that the current definition of Nibor should be maintained. The Bank is also in favour of the introduction of a more stringent and clearer method for panel banks to determine their submissions. Greater transparency surrounding the method for determining panel banks’ submissions will make it easier for users to understand movements in Nibor. This is particularly important as, under the proposed method, Nibor submissions will continue to be based on expert judgement in many cases. Norges Bank also refers to previous consultation responses.

NoRe also proposes changes in the requirements banks must meet to be panel banks. Rather than a requirement to be active in the foreign exchange forward market, NoRe proposes that Nibor panel banks be required to provide binding quotes on certificates of deposit (CDs) denominated in NOK with a minimum volume of NOK 100 million. Norges Bank supports the proposal. The number of transactions in today’s CD market in Norway is small, and such a requirement will have a beneficial effect on the development of a NOK CD market. A requirement to provide binding quotes for NOK CDs would also make it easier for other Norwegian banks to become panel banks in the future.

Norges Bank has some comments on NoRe’s proposal. We are in favour of the proposed methodology, but suggest that the documentation of and responsibility for panel bank submissions should be subject to stricter requirements. It is Norges Bank’s view that such requirements would strengthen confidence in Nibor as a reference rate and that they are necessary for Nibor to satisfy the BMR requirements. The consultation document does not state whether such requirements might be included in the Nibor rules. In Norges Bank’s opinion, requirements relating to the documentation of and responsibility for panel bank submissions are crucial factors in the choice of method and such requirements should be included in the Nibor rules. Norges Bank’s specific comments and proposals are set out below.   

Determination of banks’ Nibor submissions

In line with the BMR requirements, NoRe proposes a waterfall structure for the input data banks should use when submitting their contributions to Nibor. In order of priority, banks’ submissions should be based on:

A. interest rates on interbank loans to leading banks, or
B. interest rates paid on certificates of deposit, or
C. interest rates based on binding quotes, market data or expert judgements.

Transactions that can be included in type A submissions include:

“… interest rates that can be used without adjustment are rates on unsecured lending to a ‘leading bank’. A ‘leading bank’ is defined in the current Nibor rules as a bank with a high credit rating for short-term debt that is active in the Norwegian money and foreign exchange market on competitive terms.”

To be used in type A submissions, transactions must have a minimum volume of NOK 100 million and be conducted on the same day. If a bank has conducted several transactions that qualify as type A submissions, the bank’s submission should be calculated as the volume-weighted average interest rate on the bank’s transactions.

Banks are not required to document the underlying transactions for type A submissions. To ensure the necessary accountability, Norges Bank holds the view that all relevant aspects of banks’ submissions should be subject to a documentation requirement. This is also a requirement in the BMR. Banks should report interest rates and volumes for all transactions conducted as a basis for type A submissions. Nibor should reflect the interest rate a bank would charge on an unsecured loan to a “leading bank”. Banks should therefore report the counterparty’s name in these transactions to document that the transactions are representative of the lending conditions Nibor is intended to measure. Norges Bank proposes that type A submissions should be subject to the following requirements:

• In addition to their submission to Nibor, banks should report volume, interest rate and name of counterparty for transactions used as a basis for type A submissions.

NoRe proposes that type B submissions be based on the interest rate paid on NOK CDs with an added premium, so that a bank’s Nibor submission “reflects the interest rate a bank would charge for unsecured lending in NOK to a leading bank”. Sales of CDs must have a minimum volume of NOK 100 million. If a bank has conducted several sales, the bank’s submission should be calculated as the volume-weighted average interest rate on the CDs plus a premium.

Type B submissions are not subject to a documentation requirement. When banks submit type B submissions, they add a premium to the interest rate on the CDs they have sold to arrive at a lending rate. This premium will be difficult to evaluate as it will not be directly based on transactions. To ensure the necessary accountability, banks should be required to document the method they use to set the premium. Banks should also document interest rates and volumes for the CD sales transactions used in their submission. Norges Bank proposes the following additional requirements for type B submissions:

• Each bank must document the method used to set the premium added to the interest rate paid on CDs.
• The bank’s methods must be approved by the administrator.
• When banks submit type B submissions, they should also submit documentation of the basis for the premium they have added to their submission to the calculation agent. The banks must also document interest rates and volumes for sales of CDs used in the submission.

NoRe writes the following on how banks should determine type C submissions: 

“If there are no transactions that qualify for type A or type B submissions, panel bank submissions must be based on expert judgement. Such judgement should be based on relevant available market information on the following:

• The bank’s borrowing costs in currencies other than NOK, preferably based on actual transactions or binding quotes.
• The bank’s own binding quotes for CDs.

If information about a bank’s borrowing costs in other currencies is used, the krone rate should be calculated

• as a weighted average that reflects the bank’s funding structure in different currencies, where
• the contribution from each currency is determined as the sum of the relevant foreign interest rate and the return derived from the spread between the relevant spot and forward rate, the ‘forward premium’.”

When banks use their own quotes or base their submissions on funding costs in a foreign currency swapped into NOK, a premium should be added, as for type B submissions.

The proposal does not specify whether banks should consider funding costs in a foreign currency swapped into NOK or their own CD quotes first when determining type C submissions. Moreover, there are no requirements for banks to document the methods they use to set quotes for CDs, the interest rate on foreign currency funding, the forward points for swapping of foreign currency funding into NOK or the premium added to convert the borrowing rate into a lending rate.

Owing to the low number of transactions in the markets for type A and type B submissions, banks’ contributions to Nibor will probably be based in most cases on type C submissions. NoRe also points this out in its consultation document. In order to ensure adequate accountability and transparency in the calculation of Nibor, it is therefore particularly important that submissions of this type are subject to clear requirements with regard to documentation. A method that is as transparent as possible makes it easier for users of Nibor to understand how banks determine their submissions. A good method for type C submissions is particularly important for confidence in Nibor as a reference rate, as these submissions are not directly based on transaction data.

In Norges Bank’s opinion, the proposed method for type C submissions will make it difficult to understand how banks determine their submissions. The proposal allows banks to choose freely between basing their type C submissions on funding costs in foreign currency swapped into NOK, binding quotes for NOK CDs, or a combination of these. In addition, banks are required under the proposal to add a premium in order to arrive at a lending rate. It will be difficult for users to differentiate between these components and thus difficult to know the reasons behind changes in a bank’s submissions.

Norges Bank therefore proposes that the method for type C submissions should be simplified and that a documentation requirement should be included. We propose that a bank’s type C submissions should be based on the interest rate on binding quotes for NOK CDs, with the addition of a premium in order to arrive at a lending rate. The bank should submit documentation of the basis for its submitted CD rate and the premium that has been added along with their submission. Panel banks’ Nibor submissions could then be decomposed into the binding rate on CDs and the premium on lending, while the documentation ensures that banks are accountable for their submissions.

Norges Bank shares NoRe’s view that drawing up a detailed regulatory framework governing how banks’ type C submissions should be determined would not be useful. Under our proposal, it would be up to the banks to decide how to set their NOK CD rates and the premium to arrive at a lending rate, but their methods would have to be documented. When banks submit NOK CD rates, they will probably in practice take their funding costs in a foreign currency swapped into NOK into consideration. Nibor will thus in most cases still be based on banks’ funding costs in a foreign currency swapped into NOK plus a premium. One advantage of our proposal is that it will be clearer whether movements in Nibor are driven by changes in banks’ funding costs or changes in banks’ required premium on lending.

In type C submissions, banks should use CD rates quoted at a time that is as close as possible to the time of the publication of Nibor. The banks should also use CD rates quoted at the same point in time. NoRe’s proposal that submissions should be made at the latest at 11.30 am does not meet this objective. Norges Bank therefore proposes that when the banks submit their type C submissions, they should use quoted CD rates at 11.15 am on the same day.

To sum up, Norges Bank proposes the following method for type C submissions:

• Banks must base their submissions on their binding quotes of NOK CD rates at 11.15 am on the same day.
• Each bank must document the method used to determine quoted NOK CD rates. The method must be approved by the administrator. The banks must submit documentation of the basis for their quoted CD rates to the calculation agent every day along with their Nibor submissions.
• A premium is added to the quoted CD rate in order to arrive at a lending rate. The bank’s method for determining this premium must be approved by the administrator. The banks must submit documentation of the basis for the premium to the calculation agent every day along with their Nibor submissions.

Requirements relating to systems for the distribution of responsibility and approval of submissions

The consultation document does not refer to requirements relating to panel banks’ systems for the distribution of responsibility and approval of banks’ submissions. Since the panel banks are subject to the BMR requirements, they must in any case comply with requirements for internal guidelines for approval and responsibility for the submissions.  Norges Bank calls attention to the importance of specifying this point in the Nibor rules. Clear requirements relating to systems for the distribution of responsibility and approval of submissions will strengthen confidence in Nibor as a reference rate and harmonise the Nibor rules more closely with the regulations governing ibor rates in other countries.

Sincerely,

Olav Andreas Bø
Executive Director

Ketil Johan Rakkestad
Director

Copy to: Finanstilsynet

Fotnoter

1) https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R1011&from=EN