U.S. Markets

Plan to end Libor pricing for new loans by September may prove tough

LONDON (Reuters) - Meeting a target to end the use of Libor for pricing new loans by September could be difficult for some firms grappling with coronavirus, Britain’s Financial Conduct Authority (FCA) said on Wednesday.

FILE PHOTO: A security officer stands outside the Bank of England, as the spread of the coronavirus disease (COVID-19) continues, in London, Britain, March 23, 2020. REUTERS/Toby Melville/File Photo

Libor, or the London Interbank Offered Rate, is an interest rate benchmark used in contracts worth about $400 trillion around the world. But the benchmark is being scrapped after banks were fined billions of dollars for trying to rig it.

The FCA has set Dec. 31, 2021 as the date to end the use of Libor completely. However, to help achieve this, banks should stop pricing new loans against Libor by Sept. 30, 2020.

Ending its use is one of the biggest tasks faced by markets in decades as contracts are switched to alternatives compiled by central banks in Britain, the United States and the euro zone.

The FCA said it had held talks with the Bank of England and an industry working group on the impact of coronavirus on ending the use of Libor.

“The central assumption that firms cannot rely on Libor being published after the end of 2021 has not changed and should remain the target date for all firms to meet,” the FCA said.

“There has, however, been an impact on the timing of some aspects of the transition programs of many firms ... It is likely to affect some of the interim transition milestones.”

Regulators and an industry working group had agreed that new loans should be priced with Sonia, an overnight interest rate compiled by the Bank of England, from the third quarter.

The aim is to minimize as far as possible loans being priced against Libor beyond 2021. A similar milestone for swaps contracts passed this month.

“Alongside other international authorities, the Bank of England, FCA and Working Group will continue to monitor and assess the impact on transition timelines, and will update the market as soon as possible,” the FCA said.

Libor is compiled by banks submitting quotes to an independent administrator.

Market participants don’t expect the 2021 deadline to change given banks have only agreed to keep submitting quotes until that date and the use of alternatives will have increased significantly by then in new contracts.

“Libor transition isn’t like other deadlines, as whether Libor ends at the end of 2021 is dependent on whether panel banks continue making submissions,” said Ann Battle, assistant general counsel and head of benchmark reform at the International Swaps and Derivatives Association.

The FCA has said it would not compel banks to submit quotes after the end of 2021 and that market participants cannot assume that Libor would continue after then.

Reporting by Huw Jones; Editing by Carolyn Cohn and Edmund Blair