British watchdog asks markets to prepare for Libor demise
LONDON (Reuters) – Markets must prepare for the announcement of the benchmark Libor rate cut at the end of 2021, Britain’s Financial Conduct Authority said on Wednesday.
The Libor, or London Interbank Offered Rate, is used to price derivatives and mortgage contracts for multi-billion dollar business loans and credit cards around the world, but it is being phased out after the banks were fined for trying to manipulate it.
“Market participants should be ready for announcements later this year indicating what will happen at the end of 2021,” FCA market director Edwin Schooling Latter said at an online event.
Ending Libor has been one of the biggest tasks for markets for decades.
“The scenario you need to be prepared for is that these are ceasefire announcements,” he told a conference hosted by the Association of Corporate Treasurers.
“The transition away from Libor has not been postponed due to COVID-19.”
This quarter and the next will be critical for contracting existing contracts at alternate rates and using alternate rates for all new business, he said.
Most of the contracts denominated in pounds sterling will switch to the Sonia overnight rate from the Bank of England.
Since the beginning of the month, banks have been required to offer customers non-Libor alternatives, and from the end of the first quarter of 2021, Libor loans can no longer be offered.
Clients should check that there are no gaps in coverage between products if their derivatives and loans pass to Sonia at different speeds.
“Reviewing all of your exposures in the cycle … has to be the starting point,” said David McNally, director of Deutsche Bank.
Libor has “terms” that span months or years, but much of Sonia’s use will be based on the “compounding” of the rate over the term of a contract.
“Everyone inside this fiscal year is very confident that the future center of gravity for interest rates will be these overnight rates made up of arrears,” Schooling Latter said.
Reporting by Huw Jones; Editing by Alison Williams and Bernadette Baum