Bank of England and City watchdog urge firms to accelerate Libor transition
The City regulator and Bank of England have joined forces to urge banks and insurers to accelerate plans to transition away from the discredited Libor interest rate benchmark.
Firms have until October to stop writing loans tied to the London Interbank Offered Rate (Libor), which is embedded within some $350 trillion (£268 trillion) of financial products worldwide.
The Financial Conduct Authority (FCA) and BoE today said financial firms must step up their efforts to move away from the rate, which is scheduled to be mothballed by the end of 2021.
The Libor rate was widely discredited following the 2008 global financial crisis, when authorities in Britain and the US discovered traders had manipulated the rate to make a profit.
In a joint letter to senior managers of UK banks and insurers, the regulators reiterated a statement by the BoE’s financial policy committee (FPC) that “The intention is that sterling Libor will cease to exist after the end of 2021. No firm should plan otherwise.”
The regulators also encouraged managers to switch the convention for sterling interest rate swaps from Libor to the replacement Sterling Overnight Index Average (Sonia) rate by 2 March, but did not specify what sanctions firms could face if they do not meet the scheduled deadlines.
“In most products, market participants have made impressive progress in moving away from Libor. The time has come to draw to a close its remaining use,” said FCA director of executive strategy Christopher Woolard.
“Firms must act now to help meet these targets and ensure a smooth transition to alternative rates by end-2021.”
Claude Brown, a partner at law firm Reed Smith, described the regulators’ efforts as “a turning of the screw in order to bring about the sought after change.”
“Despite exhortations and outreach programmes by the regulators, a worrying number of market participants are woefully behind the curve. Some are not on schedule and others are preferring to do nothing until there is more clarity on the replacement rates,” he continued.
According to a recent report by Reuters, many British banks are unlikely to hit the October deadline to stop issuing loans tied to Libor.
Figures from the two rival firms that supply loan management software to the industry told Reuters that not all banks will be ready for the transition, and that only a handful of loans linked to Sonia have been issued so far.
“Financial services firms have to date adopted a wait and see approach, with the mantra “this might not happen”,” said Murray Longton, principal consultant at management consultant Capco.
“Previously the onus has been on banks, asset managers and corporates to work together to make calculated decisions as to how best transition from Liborto risk free rates. Evidently, today’s announcement… shows frustration at the rate of change and transition – it’s not happening quickly enough.”
Sign up to City A.M.’s Midday Update newsletter, delivered to your inbox every lunchtime