U.S. Markets

UK watchdog tells markets to prepare for Libor's demise

LONDON (Reuters) - Markets must prepare for announcements that the Libor interest rate benchmark will cease at the end of 2021, Britain’s Financial Conduct Authority said on Wednesday.

Libor, or London Interbank Offered Rate, is used to price contracts from derivatives and mortgages to company loans and credit cards worth trillions of dollars globally, but it is being scrapped after banks were fined for trying to manipulate it.

“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.

Ending Libor is one of the biggest tasks for markets in decades.

“The scenario that you need to be ready for is that those are announcements of cessation,” he told a conference organised by the Association of Corporate Treasurers.

“The transition away from Libor has not been postponed because of COVID-19.”

This and the next quarter will be critical for switching existing contracts to alternative rates, and using alternative rates for all new contracts, he said.

Most sterling-denominated contracts will switch to the Bank of England’s overnight Sonia rate.

From earlier this month, banks were required to offer customers non-Libor alternatives, and from the end of the first quarter of 2021, Libor loans can no longer be offered.

Customers should check there are no gaps in hedging across products if their derivatives and loans switch to Sonia at different speeds.

“Looking at all of your exposures in the round... has to be the starting place,” said David McNally, a director at Deutsche Bank.

Libor has “terms” stretching out months or years, but much of Sonia usage will be based on “compounding” the rate over the term of a contract.

“Everyone on the inside of this exercise is very confident that the future centre of gravity of interest rates is going to be those overnight rates compounded in arrears,” Schooling Latter said.

Reporting by Huw Jones; Editing by Alison Williams and Bernadette Baum