Next Steps

There are no current plans to adopt FAIRFix in any of the ARR markets. However, it would be relatively easy to incorporate the methodology into any existing ARR term fixings.

This might work in a number of ways, but probably the easiest way would be to invite the market makers in the ARR market in question to start submitting daily bids and offers in 1 months, 3 month, 6 month and 1 year OIS swaps to a daily auction that could be run one of the established trading venues. These orders would make up the competitive order book of the auction. Initially, there would be no obligations on the market makers and they would be free to choose whether to submit or not: The orders would be equivalent in nature to the prices they currently show to their voice brokers. We would then calculate a weighted mid market rate and publish that rate on the FAIRFix Portal. This would be intended as a proof of concept to demonstrate that FAIRFix was a viable term fixing option.

The administrator of the existing term fixing would then need to consult the users of their existing fixing with a view to transitioning this fixing onto the FAIRFix methodology. This is less problematic than it appears as many of the existing fixings (eg CME term SOFR fixings) already have a provision for just such an evolution in the fixing methodology.

It would then be necessary to get firm commitments from market makers to provide sufficient liquidity at the auction, though presumably this would have formed part of the consultation process.

What if no term fixing existed?

If an ARR market did not already have a term fixing (eg SARON) then it is still possible to proceed and create on. We would start in exactly the same way as for markets with an existing fixing that was looking to transition onto FAIRFix.

There would be a comparable auction for all the desired tenors (eg 1 month, 3 months etc) and the resultant rate would be published by a benchmark administrator in beta form to give end users a chance to develop more confidence in the fixings. After a suitable period of time, the plan would be to go live and would then get all bank participants to promote the FAIRFix term fixing rates to their loan desks and syndication teams, encouraging them to start using these term rates in their ARR deals.

This would allow loan desks to issue simple loans (i.e. without a complicated overnight accrual) to their customers indexed against a term ARR fixing, while allowing the loan desk itself the ability to swap their fixing rate exposures back to the overnight ARR fixing. This would enable end users to vastly simplify their operations and, in the case markets that hadn’t yet adopted ARR, would enable transition away from the old IBOR markets with no IT or risk management changes whatsoever. Additionally it would provide provide loan desks with the ability to manage all their assets and liabilities against the overnight fixing rates of the new ARR.

In the capital markets, it would enable the origination of Floating Rate Notes indexed against term fixings, vastly simplifying interest calculation (and transition away from IBOR rates where relevant) and providing perfect derivative hedges that could swap exposures from the FAIRFix Term Fixing into overnight ARR fixings, fixed rates or alternative currency interest rates (via FAIRFix Cross Currency basis swaps).

Increased liquidity in ARR Markets

By introducing end user interests into the price discovery process for ARR term fixings, not only would we end up with more robust and representative fixings based on supply and demand, but also, the FAIRFix methodology would ensure that this liquidity filters into the interbank market further improving liquidity in ARR OIS trading. This would help nascent markets such as the non-LIBOR markets that didn’t switch to ARR in 2022 to quickly develop to the level required to support transition. Additionally, as FAIRFix swaps would be priced on the same projected interest rate curve as regular OIS swaps, the development of medium term swap market pricing would be swift and simple once liquidity developed in regular OIS markets for that ARR.