The infamous Libor benchmark lending rate is set to be dropped in 2021, the UK’s top financial regulator said today.
Financial Conduct Authority (FCA) boss Andrew Bailey said the London interbank offered rate (Libor) will no longer receive the backing of regulators as the industry tries to move to a more reliable marker.
Libor, which determines the rate charged to banks for borrowing from each other, became embroiled in a rigging scandal that led to sizeable bank fines and saw criminal charges brought against a number of traders including Tom Hayes, formerly of UBS.
The key benchmark is currently referenced in $350 trillion (£268 trillion) of contracts throughout the world, according to the Bank of England.
However, it remains unclear how these contracts will continue to function after Libor has been superseded.
It is also unclear which rate will replace Libor. Last week, Bank of England governor Mark Carney suggested the sterling overnight index average (Sonia) could replace the overnight Libor sterling rate.
But with different rates for five major currencies in seven distinct lengths of time, banking authorities around the world will be forced to negotiate multiple alternatives.
Yesterday's landmark announcement from Bailey was widely welcomed, with both the City and Westminster keen to draw a line under the long-running rigging scandal.
“Andrew Bailey’s announcement reflects the general market view that Libor is no longer fit for purpose,” said Mark Field, Tory MP for the City of London.
Chris Philp, another Tory MP and a member of the Treasury Select Committee before the last election, said: “This is an extremely welcome announcement. Clearly the subjectivity of Libor has caused considerable problems in the past and making it a calculation rather than a judgement call is a hugely welcome step.”
However, Hayes, the first trader to be convicted of rigging Libor, suggested the end of Libor would not mark the end of the scandal.
“It may well be the case that the market wants to move away from judgement-based benchmarks and over to transaction-based indices,” he told City A.M. “But Libor will not be dead and buried until the miscarriages of justice that derivatives traders and Libor submitters have faced at the hands of the Serious Fraud Office are exposed and reversed.”
InterContinential Exchange (ICE), which took over the administration of Libor in 2014, said that the benchmark rate would continue and still be usable.
The administration of the benchmark rate, used in corporate lending, mortgages, and even student debt, was passed from the now superseded British Bankers' Association to the independent Intercontinental Exchange (Ice) in 2014. Bailey noted the FCA has no evidence of any further wrongdoing in setting the rate, after a "step change" in the governance around setting the rate.
However, Bailey said the lack of liquidity in the market for unsecured wholesale term lending between banks which Libor is intended to represent meant the benchmark struggles to accurately reflect true conditions. Banks conducted only 15 transactions over the course of 2016 for one of the currency pairs, Bailey noted, despite having to give daily estimates.
He said: "In our view it is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them."
The FCA is aiming for a "planned and orderly" transition away from Libor over the next four years to other so-called risk-free reference rates, such as the Bank of England's Sonia, the Sterling Overnight Index Average.
Read more: The Libor trials: Where we are now