Wednesday 7 October 2020 12:05 pm

Prepare for Libor’s demise, City regulator tells markets

Financial markets need to prepare themselves for regulatory announcements about the Libor benchmark interest rate ceasing at the end of next year, the City watchdog said. 

“Market participants need to be ready for announcements later this year setting out what will happen at the end of 2021,” the FCA’s director of markets, Edwin Schooling Latter, told an online event today. 

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“The scenario that you need to be ready for is that those are announcements of cessation,” he said. 

Libor, or the London Interbank Offered Rate, is an interest rate benchmark used in contracts worth around £355 trillion globally. 

The rate was widely discredited after banks were fined billions of dollars for trying to rig it for a profit, and global regulators including the Financial Conduct Authority (FCA) are pushing to scrap it by the end of 2021. 

In March, the regulator warned that the coronavirus pandemic was likely to make it harder for some firms to meet milestones for the transition from Libor to other rates such as Sonia – an overnight interest rate compiled by the Bank of England. 

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But some borrowers remain slow to adopt rates such as Sonia, the sterling overnight index average, as they only show the interest due on a loan just before a payment is due.

However the FCA said at the time that its “central assumption” was still that firms could not rely on Libor being published after the end of 2021. 

Today’s warning from the FCA comes as Natwest launches a campaign encouraging its customers to abandon the discredited rate. 

The bank is writing to 3,500 companies to explain how delays in switching rates could increase the volatility of their borrowing costs and how to choose the most suitable new benchmark before Libor disappears at the end of 2021.

The campaign coincides with the banking sector’s third quarter deadline on offering alternative risk-free rates on new loans, and comes six months before new lending referencing Libor is banned.

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“We’re starting to see a very small handful of blue chips at the top of the pyramid going straight into a Sonia facility but it’s taken quite some time to get there,” said Jamie Thrower, Natwest’s Libor transition lead for customers. 

“The base of the pyramid comprises the majority of corporates for whom Libor transition has not grabbed their attention in the same way as other challenges they face,” he added.