FCA to scrap LIBOR by 2021

[BrilloPad]

The SONIA interest rate benchmark | Bank of England

Now the banks will manipulate that instead.

What is needed is stricter punishment for those breaking the rules. Crucifixion would be nice. Starting with Ernest Saunders.

[Martin@AS Financial]

Taken from the Financial Reporter

The FCA has announced that the LIBOR rate will be scrapped by 2021, as it is a "less useful benchmark than it used to be".

Twenty panel banks submit contributions to the benchmark, which measures how much they'd be able to borrow across currencies and time periods, but the FCA believes the underlying market that LIBOR seeks to measure – the market for unsecured wholesale term lending to banks – "is no longer sufficiently active".

Speaking at a Bloomberg event, Andrew Bailey, Chief Executive of the FCA said: "It 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".

Bailey also believes that there is an "inherently greater vulnerability to manipulation when rates are based on judgements rather than the real price of term funding", adding that there are a host of questions about whether and how such reference rates can respond to stressed market conditions.

He added that for many of the contracts for which term LIBOR is used as a reference, there is not a real need to capture in the reference rate a measure of term or bank credit risk premia.

LIBOR is also widely used in loans to non-financial corporates, and, in some countries, even in retail financial markets to calculate the interest that a consumer pays on a mortgage. "It is difficult", Bailey said, "to see a benefit to the corporate or retail borrower from having increased interest payments if bank credit quality declines and LIBOR rates therefore increase."

In April, the Risk Free Rate Working Group in the UK selected reformed SONIA as its proposed alternative benchmark.

Earlier this month the Bank of England convened a round table to discuss plans for transitioning to the chosen near risk free interest rate benchmark for sterling.

Emma Brooks, partner at Byrne and Partners, said: “This announcement by the FCA comes as no surprise to anyone who has followed the seemingly never-ending LIBOR debacle. The significant flaws in the system the banks used in order to set their LIBOR rates were exposed over and over again during the recent LIBOR trials. It’s become obvious that for some time, the LIBOR rate has not been a true reflection of where the markets were trading. This became absolutely clear when evidence emerged of ‘low balling’ during the financial crisis when those on the panel banks were allegedly being directed by the Bank of England to set their rates at artificially low levels.

“Given the huge fines imposed by the FCA on the banks for manipulating the rate and the criminal convictions that have followed for some individuals unfortunate enough to be caught up in the mess, is it any wonder that the banks aren’t exactly queuing up to be on the panel any more? The only real surprise is that it’s taken the FCA so long to decide to scrap a system which has clearly been broken for so long. This decision, on top of the recent acquittals of two of the Barclays bankers will only vindicate the efforts of those individuals still seeking to appeal their convictions.”