As expected, the Financial Conduct Authority (FCA) officially rung the death knell for nearly all Libor rates from the end of this year, putting pressure on market participants to accelerate the switch in interest rates used in $260 trillion of contracts around the world.
The FCA announcement covered all 35 Libor settings at once, giving firms a clear set of deadlines across all currencies and tenors.
Following a consultation by ICE Benchmark Administration (IBA), the administrator of Libor, the FCA confirmed that publication of Libor would cease at the end of 2021 for sterling, euro, Swiss franc and Japanese yen, and for one-week and two-month US dollar settings.
There is more breathing space in the US which has $200tn of dollar contracts tied to the benchmark and until June 2023 to make the move.
Adoption of new dollar benchmarks has been slow, partly because more loans and bonds are tied to the dollar Libor than any other currency.
The US replacement is also a new rate, rather than an enhanced existing rate, as has been the case in the UK as well as in other currencies. US authorities have also begun applying pressure to derivatives, bond and loan markets, warning users not to open new exposures after December.
The FCA also said it would consult with the IBA in regard to the continuation of publishing a few so-called synthetic Libor rates, to help the industry manage long-term existing contracts that would be tough to amend before Libor ended.
However, the UK regulator made it clear that the rates will only be temporary, and it would not allow new business to be written referencing the synthetic Libor rate
“Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable Libor rates and build a more robust foundation for the financial system,” Bank of England Governor Andrew Bailey said in a statement.
He added, “With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.”
Many still have work to be done. As Ovie Koloko, global head of product development for TP ICAP Data & Analytics, put it, “Clarity around the specific currencies is of course welcome given the scale of the operational task. There is so much for financial institutions to consider around the transition. Before the issue of access to the right pricing data comes into play, there is a significant legal and IT systems challenge to overcome.”