FCA to cut ties with Libor over next five years

FCA will no longer sustain Libor as bank submissions have not improved, according to chief executive, Andrew Bailey.

The Financial Conduct Authority (FCA) will no longer support banks using Libor, one of the most used interest rate benchmarks, by the end of 2021.

Andrew Bailey, head of the FCA, said at an industry event that Libor, the interbank benchmark which underpins more than $350 trillion of financial instruments, is no longer sustainable due to a lack of transaction activity

“The absence of active underlying markets raises a serious question about the sustainability of the Libor benchmarks that are based upon these markets. If an active market does not exist, how can even the best run benchmark measure it?” said Bailey.

He stated in the FCA’s view, Libor is not only potentially unsustainable, but also undesirable for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them.

In a last bid attempt to revive Libor, the FCA will sustain the benchmark for the next four to five years, after which it will cut ties if panel banks do not improve submissions.

Bailey said the transition period is long enough to significantly reduce risks and costs of a more sudden change.

There have been moves around the world to rely less on Libor and transition to alternative benchmarks. Last month, the US Alternative Reference Rates Committee announced the adoption of a Treasuries repo-based rate as an alternative to Libor.

The Bank of England’s Mark Carney also recently said that Libor is no longer suitable, and had been proposed to replace the use of Libor in derivatives contracts with the Sterling Overnight Index Average (Sonia).

Libor has been shrouded in controversy in recent years following allegations of conspiracies and penalties from banks for rigging rates. Around 20 major banks have been caught up in court cases and investigations to do with benchmark manipulation.

In a bid to enhance transparency in the FX market, NEX Group’s data business announced this week it has launched a series of 30-minute FX benchmarks aimed at providing regular, accurate and reliable price information for major currency pairs.

The EBS FX benchmarks are based on transactions and orders during the ten-minute fixing window on NEX Markets EBS FX central limit order book.