Ditch Libor to avoid New Year's Eve 2021 hangover - UK regulator

LONDON (Reuters) - Companies should press ahead with ditching Libor for pricing loans if they want to avoid a corporate hangover after New Year’s Eve 2021, Britain’s financial watchdog said on Wednesday.

FILE PHOTO: A cyclist is seen infront of the Bank of England as the spread of the coronavirus disease (COVID-19) continues, London, Britain, April 14, 2020. REUTERS/John Sibley/File Photo

The coronavirus pandemic has delayed until early 2021 some interim milestones for ending the use of the London Interbank Offered Rate that is used to price financial contracts worth around $400 trillion globally.

This has raised hopes among companies that an end-2021 deadline for scrapping Libor, a rate banks were fined billions of dollars for trying to rig, will also have to be pushed back.

But Edwin Schooling Latter, director of markets and wholesale policy at Britain’s Financial Conduct Authority, sought to quash such hopes.

“This change is going to happen,” he told an Association of Corporate Treasurers webinar.

The switch to pricing new bond and swaps contracts using Sonia, an overnight rate compiled by the Bank of England, is complete or advanced, but the loans market used by companies for funding lags, he said.

While it won’t be practical or feasible to convert all “legacy” contracts that still reference Libor before the end of 2021, there was no legislative fix in the pipeline to get rid of this “knotty” issue, Schooling Latter said.

“If you want to have control over what your interest rate obligations and entitlements are going to be going forward, then waiting for legislative relief is not the solution,” he said.

“Don’t be left there without a plan on New Year’s Eve 2021. That is not going to be a good New Year celebration if that’s where you are at.”

Without pre-emptive action, the end of Libor would mean contracts facing pricing uncertainty and potential legal disputes.

David McNally, a director in Deutsche Bank’s corporate banking arm who is overseeing the transition, said companies should avoid what could be a “Y2K event on steroids”, a reference to fears that computers would stop working at the turn of the 21st century.

“Seize the time between now and then to refinance and/or amend your existing agreements to be consistent with the way the market is going to operate in the future,” McNally said.

Reporting by Huw Jones; Editing by Toby Chopra