By Huw Jones
LONDON (Reuters) – Banks could be punished if they don’t switch enough contracts from the Libor interest rate benchmark to a Bank of England alternative by the end of 2021, a senior British regulator said on Wednesday.
The Financial Conduct Authority has told each bank to nominate a senior manager who is accountable to regulators for ensuring that contracts switch from referencing the London Interbank Offered Rate, or Libor, to the BoE’s sterling overnight rate, Sonia.
The FCA has the authority to fine or remove a senior banker’s licence.
“We don’t expect banks to be dragging their feet; we expect them to be proceeding,” Edwin Schooling Latter, director of markets and wholesale policy at the FCA told a conference on Wednesday.
“Where people are breaching rules, then enforcement is always a possibility. I very much hope it will not be a necessary tool in this case,” Schooling Latter said.
Regulators in Britain, the United States and elsewhere want a shift away from Libor after banks were fined a combined $9 billion for trying to rig the rate.
Central banks want to see Libor replaced by “risk-free” rates, like the BoE’s Sonia, which are based on actual market transactions and thus harder to rig. Libor is based on quotes from a panel of banks.
The shift from Libor, a rate used in products like mortgages, company loans and credit cards worth $300 trillion globally as a price reference, is one of the biggest challenges faced by the financial sector.
Schooling Latter said transition to Sonia in the swaps, derivatives, bonds and securitisation markets was going better than many had predicted.
Progress has been slower in loans, which the 50-year old Libor was originally devised for, though “green shoots” are emerging.
“I know there are corporates asking for overnight Sonia referencing loans,” Schooling Latter said.
He welcomed the announcement this week from Natwest bank that it would introduce Sonia-referenced loans this year.
Associated British Ports received consent from its bondholders this month to switch the rate underpinning its 65 million pounds of floating-rate notes due in 2022 from Libor to Sonia.
“That has established a model that can be used by others. It would be good to see that happening more and more and become something for those who are nervous about it, more comfortable,” Schooling Latter said.
Banks have agree to continue submitting quotes for compiling Libor only until the end of 2021, meaning it could disappear after then, although industry officials say not all outstanding contracts can be amended to use Sonia.
Libor use in new contracts after 2021 could be prohibited if it was no longer “representative” of the market – with knock-on effects on contracts already referencing Libor, Schooling Latter said.
“The market for Libor referenced instruments is going to be really impaired at that point when Libor is found not representative.”
(Reporting by Huw Jones, editing by Larry King)