Libor Benchmark Will Be Dropped In 2021, FCA Says

Barclays was the first bank to be embroiled in the Libor-rigging scandal

Barclays was the first bank to be embroiled in the Libor-rigging scandal

Andrew Bailey said the London Interbank Offered Rate needs to be replaced because the market for unsecured wholesale.

Before the Libor scandal erupted in 2012, the benchmark had been compiled by the British Bankers' Association, which has since merged with Payments UK, the Council of Mortgage Lenders, the UK Cards Association and the Asset Based Finance Association, to form a combined lobby group UK Finance. Since then there have been a series of changes to the way the benchmark is calculated, with a focus on tying it more closely to real transactions.

"To take an extreme example, in one currency-tenor combination, for which a benchmark reference rate is produced every business day using submissions from around a dozen panel banks, these banks, between them, executed just fifteen transactions of potentially qualifying size in that currency and tenor in the whole of 2016".

That change has been hard, Bailey said: "Because the underlying market that Libor seeks to measure - the market for unsecured wholesale term lending to banks - is no longer sufficiently active".

The banks may still produce the rate after that point, he said, but if it does continue it will "no longer be sustained through the mechanism of the FCA persuading or obliging panel banks to stay".

Sonia - the Sterling Overnight Average Index - has already been identified as a potential alternative, but Bailey said that a transition is unlikely to get under way if the market assumes Libor will continue indefinitely, which is why the FCA has set an end date.

The Bank of England is working to co-ordinate plans for transitioning.

In a speech delivered this morning in London, Bailey said banks had agreed "voluntarily to sustain Libor for a four- to five-year period, i.e., until end-2021".

Mitul Patel, head of interest rates at fund manager Janus Henderson, said in a note following the speech that the transition to Sonia would be "lengthy and difficult".

The benchmark, which has been used to price financial contracts since 1986, ranging from personal loans to mortgages worth over $350trn (£266.50trn) has been the subject of much controversy in recent years.

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