Monday 1 October 2018 1:14 am

Firms risk being left behind in Libor benchmark transition warn bankers


A lack of awareness of the urgent need to transition away from scandal-hit Libor interest rates means some firms risk not being ready before the benchmarks become defunct, according to a top banker working on the issue.

There remains a significant amount of work to educate firms about the far-reaching implications of the shift from rates which underpin contracts worth trillions of pounds, according to Francois Jourdain, a Barclays managing director who chairs the Bank of England’s Risk Free Reference Rate Working Group.

“There may be people who won’t be ready, but the momentum is moving forward now,” said Jourdain, speaking ahead of a conference with clients on the issue at the end of last week. “The biggest obstacle is awareness, so we are very focused on educating our clients on this topic.”

The Bank of England last month wrote to chief executives of all banks and insurers it regulates telling them it expects to see analysis of their exposures by 14 December. Firms must also gain board sign-off on their plans and nominate a senior manager with personal responsibility for the move.

Banks and businesses will have to update their systems to adapt to a new rate which is calculated on a daily basis, rather than over set time periods. In the UK the new benchmark will be the Sterling Overnight Index Average (Sonia), with a concerted push by banks and other financial services providers to build up liquidity.

“We need to build the foundations of these new markets so they can be embraced by all involved,” said Jourdain. He expects markets in some Sonia-linked instruments to be mature by the middle of next year, while liquidity in Libor-linked instruments could suffer in 2021 because of the uncertainty over its future.

The Libors, London Interbank Offered Rates, functioned as the benchmarks referenced in contracts with notional values in the trillions of pounds, across five currencies and seven maturities. Intercontinental Exchange still runs improved versions of the Libors, but regulators at the Financial Conduct Authority have said they will not compel banks to support the rates after 2021, risking their disappearance unless a suitable backstop alternative is found.

Risks are concentrated in the estimated £34 trillion of contracts in sterling derivatives markets alone, as well as more than £200bn in lending to British businesses. Similar transitions are currently taking place in the US, Eurozone, Japan, and Switzerland, which all relied on Libors until failings were exposed during the financial crisis. In non-sterling markets Libors are widespread in retail mortgage contracts – unlike in the UK – complicating the transition even further.

“It reaches all areas of finance and the whole of the economy,” said Jourdain.

As well as the manipulation scandal which rocked the City, when London-based bankers were found to have submitted incorrect rates for profit, structural changes in the wholesale lending markets have undermined Libor, with fewer transactions on which to base it.

“The Libor is just not sustainable any more,” said Andreas Giannopoulos, head of benchmark interest rates governance, Barclays. “There aren’t enough transactions to underpin it.”