UK watchdog says Libor end game may be uncertain

LONDON (Reuters) - The end-game for the interest rate benchmark Libor is uncertain, and regulators will seek to give markets notice when they no longer believe the rate is reliable, a senior UK markets watchdog official said on Monday.

FILE PHOTO - The Canary Wharf financial district is seen in east London November 12, 2014. REUTERS/Suzanne Plunkett

Used as a price reference in financial contracts and derivatives worth $350 trillion globally, Libor reflects borrowing costs among banks and is based on quotes submitted by lenders.

But banks have been fined $9 billion for trying to rig the benchmark, which is being replaced in Britain by the Bank of England’s Sonia overnight rate.

“There is now wide recognition that Libor will come to an end,” said Edwin Schooling-Latter, director of markets and wholesale policy at the Financial Conduct Authority (FCA).

Regulators say the market for interbank lending is too patchy to base a widely-used benchmark on and want Sonia to replace sterling Libor by the end of 2021.

Sterling swaps referencing Sonia account for 19 percent of the market, but new contracts referencing Libor are still being written for periods going beyond 2021, however.

Industry is devising a “fallback” Libor rate that could still be used in “legacy” contracts after 2021, but Schooling-Latter urged the market to push ahead with migration to Sonia.

No one should rely on a fallback being available, he said.

“We think that the best and smoothest transition from Libor will be one in which contracts that reference Libor are replaced or amended before fallback provisions are triggered,” Schooling-Latter told an ISDA derivatives industry conference.


Banks have told the FCA they would continue submitting quotes for Libor until the end of 2021, but Schooling-Latter said the regulator would intervene earlier if it felt a Libor rate had become unsafe to use in new contracts.

“The FCA would be very clear in any future announcement about the precise date at which a particular Libor rate would no longer be capable of being representative,” Schooling-Latter said. The notice period would last weeks rather than be an overnight surprise.

Regulators have set out a “roadmap” to scrap Libor but Frances Hinden, vice president of treasury operations at oil company Shell said some banks are not fully on board making the switch to Sonia for loans involving several lenders difficult.

“We are stuck,” Hinden said.

Natasha Cazenave, head of international affairs at French markets regulator AMF, said markets understood the roadmap better but there was a long way to go.

Transition has focused on derivatives market, with cash markets like bonds, notes and loans lagging.

“We would like to see the cash market move towards Sonia,” said Hinden, also a member of the FCA and Bank of England’s industry working group on Libor transition.

Reporting by Huw Jones; editing by Toby Chopra, Larr King