Libor will formally cease at the end of the year for most currencies, UK regulators said on Friday, a step that will raise the pressure on banks and asset managers to move off the tainted lending benchmark.
The Financial Conduct Authority, which oversees the global benchmarks, said publication of Libor would finish on December 31 for sterling, euro, Swiss franc and Japanese yen. One-week and two-month US dollar settings will also end at that time.
Global authorities have pushed banks, asset managers and companies to stop using the rate, which measures the cost of unsecured borrowing between banks, in favour of benchmarks based on overnight rates. Some market participants have complained that the shift opens up problems with some borrowers and lenders and hoped for more time.
“We expected this formal announcement for some time, but the magnitude of today’s news should not be overlooked. Outside the US dollar markets, this marks the end game,” said Claude Brown, a partner at law firm Reed Smith in London.
Regulators say Libor reflects a market that no longer exists and that the daily rates consist largely of estimates rather than real market transactions. From January 2022, banks will no longer need to feed daily numbers in to Libor’s calculation.
The switch-off still gives banks until June 2023 to extricate themselves from $200tn of US dollar contracts tied to the benchmark, the FCA confirmed. The decision follows a consultation in December led by ICE Benchmark Administration, which compiles and oversees the daily 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,” said Andrew Bailey, governor of the Bank of England.
Banks have shied away from contributing to Libor for several years, partly in reflection of the scandal that engulfed the benchmark more than a decade ago, and partly as the switch-off date was drawing nearer. As banks withdrew, the FCA had previously warned it could rule the Libor benchmark as unrepresentative, effectively hastening its end.
However, the FCA confirmed on Friday that it did not expect to have to make any rulings before the new planned end dates, and banks will continue to supply data for dollar Libor until mid-2023.
Take-up for new dollar benchmarks has been slow, in part because more loans and bonds are tied to 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 other currencies. US authorities have also begun applying pressure to derivatives, bond and loan markets, warning users not to open new exposures after December.
Scott O’Malia, chief executive of Isda, the industry body co-ordinating changes in the derivatives market, said the announcement meant users had firm dates to apply to the fallback rates that had been created to smooth the transition to the new rates.
Market participants had “the knowledge that viable fallback rates will automatically apply in their outstanding Libor derivatives contracts if transition efforts aren’t complete by the time the various Libor settings cease”, he added.
The FCA also said it would consult in coming months for IBA to continue 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 regulator stressed that the rates would be only temporary and it would not allow new business to be written referencing the synthetic Libor rate.