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UK financial regulators suggest phasing out Libor rate benchmark from 2021

In 2021, second substitute benchmark will be used to measure bank credit risk & funding markets

Reuters  |  London 

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A substitute for the widely-used should be in place for to use by the end of 2021, the head of Britain's financial watchdog said.

Libor, a daily rate in a range of currencies, is based on submissions from of interest rates they believe they would be charged by others for borrowing money. have been fined billions of dollars for trying to manipulate the benchmark, forcing a rethink of its future.

The is used to price financial contracts worth $350 trillion, ranging from home loans to credit cards, and of Governor Mark Carney said this month that such a reference rate should in future be based on actual market and not banks' judgements.

Andrew Bailey, chief executive of the Financial Conduct Authority, told an event in on Thursday that work must "begin in earnest" on shifting to an alternative index, saying the end of 2021 would offer time to ensure a smooth transition.

"By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counterparties and users as is practicably possible."

has to be replaced because there are too few underpinning it, Bailey said, adding just 15 were executed in the whole of 2016 for one daily variant of

A based on "expert judgement" of is fragile, and there is little prospect of the becoming substantially more active in the near future, Bailey said.

"In our view it is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying to support them," Bailey said.

have voluntarily agreed to keep contributing to until 2021, but if this phase-out deadline was on course to be missed, there would be a "push" from the authorities, Bailey said, without elaborating.

At least six bankers on both sides of the have been sent to prison for manipulating Libor, although some in the United States are still awaiting sentencing.

had been compiled by the now defunct British Bankers' Association, but following the rigging scandal, this was transferred to ICE Administration (IBA), part of the Intercontinental Exchange.

ICE had no immediate comment on the FCA's announcement.

The BoE has already been refining its overnight sterling funding rate SONIA, which is based on actual and therefore seen as "near risk-free" and harder to manipulate, as a sterling substitute.

Earlier this year a BoE industry working group backed SONIA, which the central administers itself, as the substitute for

There could also be a second substitute to measure credit risk and funding that is based on a mix of SONIA and a proxy credit risk measure, Bailey said.

Setting a date would focus minds in the same way that setting an end-2017 deadline to phase out Switzerland's TOIS reference rate triggered serious work on moving to the new SARON rate, he added.

and IBA could continue to produce after 2021, if they wanted to. Existing financial contracts that reference and go beyond 2021 could be amended.

The Federal Reserve is developing a home-grown based on the repurchase agreement or repo market as an alternative to dollar Libor, which is used in around $150 trillion of private and exchange-traded derivatives.

The said in May it could replace Euribor, a euro-denominated counterpart to Libor, with a reference rate of its own.

First Published: Thu, July 27 2017. 19:00 IST