Financial regulators in the United Kingdom have stepped up warnings to major banks and insurers to cut their ties with Libor, as part of a growing push to meet a 2021 deadline to get away from the known benchmark.
On Thursday, the Bank of England and the Financial Conduct Authority informed senior business executives that they are demanding to see “clear evidence of commitment” starting next month that they are ending their addiction to Libor, to make sure the scandal change is contaminated. The rate occurs at the end of next year, when the benchmark should cease to exist. Regulators told companies that cash products linked to Libor denominated in pounds sterling should cease in September.
The Bank of England added that it was “keeping the potential use of supervisory tools under review”, a veiled threat that senior managers could be in the line of fire and that capital requirements for banks that are considered too risky They could harden if the industry did not advance in its preparations.
The authorities also set a target for March 2 so that derivative markets stop using Libor in interest rate swaps in pounds sterling and start using an alternative overnight rate called Sonia. Policy makers see a liquid derivatives market that offers daily prices as a critical factor in the overall transition.
Despite several warnings, UK regulators are concerned that not enough is being done to meet the 2021 deadline. Significant volumes of swap contracts that refer to Libor are still being written, which means that the Libor contract stock continues to grow.
Thursday’s announcements “provide a level of detailed guidance that companies have been asking for as they prepare for the Libor transition,” said Shankar Mukherjee, a partner at EY. He said the measure was “the momentum that the market needs,” providing a clear signal that companies should stop issuing Libor cash products linked to pounds sterling by the third quarter of 2020.
It is not just a problem in the United Kingdom: world authorities urgently want markets to withdraw using Libor, which supports the price of up to $ 400 billion of products worldwide, from loans to derivative contracts.
Policy makers on both sides of the Atlantic argue that the contaminated benchmark is not representative of modern markets, where banks rely less on unsecured loans for financing. Guard dogs also seek to restore public confidence after a series of manipulation scandals, which have led banks and brokers to pay around $ 10 billion in global fines.
But the change is proving complicated. Libor, or the London interbank interest rate, has been widely used since the 1980s. While derivatives and fixed income markets are beginning to change to other benchmarks, the loan and securitization markets have barely moved .
The Financial Stability Board, a collection of regulators and central banks based in Basel, said in December that it was necessary that the official sector and companies need “significant and sustained efforts” to adapt to the new benchmarks.
The president of the Federal Reserve of New York, John Williams, warned financial firms last year not to “put their metaphorical heads in the sand” during Libor’s deadline. A group of the US industry UU. You have selected the Guaranteed overnight financing rate (Sofr), based on transactions in short-term loan markets, to replace Libor.
Policymakers also want banks and insurers to have a plan to address their thousands of existing contracts that will extend beyond 2022, the terms of which may change if Libor disappears.
A UK industry working group also published an action plan on Thursday, with a rubber stamp by the BoE and the FCA. Its president, Tushar Morzaria, who is also the financial director of the Barclays group, said that 2020 “will be a crucial year in the transition journey, with a critical approach to allow the flow of new businesses out of Sterling.”
The Moody’s rating agency published a report on Thursday arguing that nightly rates such as Sonia or the dollar-denominated Sofr were less volatile in stressed situations and less exposed to credit and liquidity risk than Libor.