Consultation – Regulation on the setting of reference interest rates
Norges Bank's letter of 7 August 2014 to the Ministry of Finance.
Norges Bank refers to the letter from the Ministry of Finance of 22 April 2014 and the consultative document from Finanstilsynet (Financial Supervisory Authority of Norway) of 31 March 2014 on the draft legislative amendments concerning the regulation on the setting of commonly used reference interest rates. On 30 August 2013, the Ministry of Finance requested Finanstilsynet to assess the need for such a statutory regulatory framework. At the same time, the Ministry requested Finanstilsynet, in cooperation with Norges Bank, to conduct a study of reference interest rates in Norway. In a letter to Finanstilsynet of 26 May 2014 "Reference rate options in Norway", Norges Bank presented an analysis of the setting of NIBOR between 2010 and 2013 and set out necessary changes to the NIBOR rules. The main elements of the proposal are presented below.
In response to the manipulation of European reference interest rates, the European Commission presented a draft regulation on financial benchmark indices on 1 September 2013. The proposal requires that the framework for reference interest rates be subject to governance by an administrator. The proposal requires that the framework for setting reference interest rates and compliance by financial institutions be subject to supervision by one or more competent authorities.
A statutory framework for setting commonly used benchmark interest rates will be in line with the purpose of the proposed EU regulation and conform to the new guidelines for reference interest rates from IOSCO and EBA/ESMA. The sizeable amounts involved in NIBOR operations and impaired confidence in such reference interest rates in the wake of manipulation in other countries suggest that a solid framework be established as quickly as possible.
Under Section 1 of the Norges Bank Act, Norges Bank shall "promote an efficient payment system domestically as well as vis-à-vis other countries, and monitor developments in the money, credit and foreign exchange markets". NIBOR is an important component in determining the impact of Norges Bank's key policy rate on the economy and therefore has a direct bearing on monetary policy. The quality of the reference rate is also important for confidence in and the stability of the financial system.
A statutory framework for the setting of commonly used reference interest rates raises the question of whether Norges Bank should be assigned a more formal role as competent authority. As the central bank and by virtue of its market expertise and market operations, Norges Bank has an advantage in assessing the setting of NIBOR rates. Norges Bank can be assigned the statutory authority to approve and supervise the framework for setting reference interest rates, while Finanstilsynet, for its part, ensures that individual banks comply with the rules. Norges Bank is currently responsible for licensing and supervising Norwegian interbank systems, while Finanstilsynet is responsible for ordinary supervision of the participants in these systems.
Finance Norway, which is responsible for the Norwegian reference rate NIBOR, has implemented changes that bring the rules for quoting NIBOR more closely into line with international recommendations.
In the opinion of Norges Bank, the guidelines for NIBOR currently have clear weaknesses. NIBOR is constructed so that a foreign lending rate is converted into a NOK interest rate via the forward market. This construction reduces the transparency of NIBOR and may undermine confidence in the reference rate. The requirement that participant banks be market makers in the forward market contributes to an unnecessary and undesirable limitation on participation in the NIBOR panel.
In the opinion of Norges Bank, NIBOR should be based on an estimate of a pure NOK interest rate required for interbank lending. The forward market may be one of several indicators used for determining that interest rate. This is in line with practice in Sweden and Denmark. Thus, the panel can be enlarged to include major Norwegian savings banks. In the longer term, having more participants will enhance the robustness of NIBOR quotation.
The European Commission has proposed including in its regulatory framework a requirement for the obligatory quotation of systemically important reference interest rates. Norges Bank is of the opinion that this must be considered in connection with a statutory regulation of reference interest rates in Norway.
Norges Bank has also pointed out that the definition of the reference interest rate can and should be made more precise. Moreover, the rules should prevent employees involved in setting NIBOR from simultaneously holding individual risk mandates where NIBOR is reference interest rate. The NIBOR steering committee should comprise persons other than those who are involved in setting NIBOR.
Finanstilsynet does not find it appropriate to issue further statutory rules at present as a new EU regulation is forthcoming. At the same time, in a letter to the Ministry of Finance of 31 March 2014, Finanstilsynet notes that if specific circumstances so warrant, statutory rules may be introduced regardless of developments in the EU legislative process. The proposed changes to the NIBOR rules mentioned above pertain to matters that are unlikely to be the object of the forthcoming EU regulation. Norges Bank is thus of the opinion that the remaining uncertainty regarding the EU regulation is not a hindrance to improving the existing NIBOR framework.
Ida Wolden Bache