However, these solutions are costly for end users and, at the global level, we are far from having a network (or set of interconnected networks) that would support quick and cheap transfers of funds. Second, and in close relation to the previous point, the DLT could help remedy the current limits of the existing wholesale market infrastructures. Those wholesale infrastructures also have various shortcomings. Since RTGS are not interoperable, correspondent banking is often the only solution to transfer fiat money across borders. However, correspondent banking is costly, and the perimeter of the AML/CTF and KYC checks is in some cases uncertain for the counterparties of a payment order. Furthermore, for security reasons, the access to payment systems is limited to a certain type of entities (mainly credit institutions, investment firms, ancillary systems, etc.). Finally, cross-border payments lack traceability. The DLT could also help improve current aspects of wholesale clearing and settlement mechanisms and facilitate in particular gross and simultaneous Delivery-versus-Payment processes, cross currency settlements and resilience and recovery from operational incidents. If the issues at stake are not the same in developed as in developing countries, the objectives of crypto-assets, and in particular stablecoins, are the same everywhere. They seek to shortcut central authorities and more generally financial intermediaries. However, they bring their own problems.
This is an important wake-up call for the financial market, and market participants are spending a lot more efforts on the transition issues, with the support of ISDA and other industry bodies. 3. But, with this growing momentum, are we all geared up? I would reply with a simple ‘no’. Clearly, much more remains to be done. Transition: A challenging process even for the deep USD market 4. Among all the IBORs, USD LIBOR is the most widely used benchmark in the global market. And the US authorities have been proactively engaging with the industry in promoting the use of Secured Overnight Financing Rate (SOFR) as an alternative. 5. Since the launch of SOFR in April 2018, the trading volume of interest rate derivatives (IRD) referencing SOFR has been growing, but it remains relatively small. According to ISDA’s Interest Rate Benchmarks Review, the total traded notional volumes of IRD referencing SOFR was $ billion in Q1 2019. This was less than 0.1% of those referencing USD LIBOR, which totalled $ trillion. 6. So, even for the USD market, which is the deepest and most liquid market in the world, the build-up of transactions based on an alternative risk-free rate could take some time. For other IBORs, this could be an even longer and more challenging process. Transition: A multi-dimension challenge Wide-ranging impact arising from the transition 7. As many speakers have pointed out, transitioning to alternative reference rates is a complex multi-dimension task.