By Trevor Hunnicutt and Huw Jones
NEWYORK/LONDON (Reuters) – Federal Reserve Bank of New York President John Williams on Monday said the finance industry “must not wait” to stop using the Libor lending benchmark.
U.K. regulators have set a 2021 deadline for financial firms, including banks and investors, to transition away from the London interbank offering rate, or Libor. Globally, Libor is used to price contracts, from home loans to credit cards, worth $300 trillion (£238.9 trillion).
Libor is based on quotes submitted by banks. Its reputation as the market standard was tainted in the wake of rigging scandals by traders, which resulted in billions of dollars in fines for major global banks, effectively signalling the demise of the 50-year-old benchmark.
Regulators are encouraging banks and other financial companies to tie contracts to alternative rates, such as the Secured Overnight Financing Rate (SOFR). Williams said that transition needs to happen now, even as details on how SOFR will be used are worked out.
“We need a mindset shift where firms realize that every new U.S. dollar Libor contract written digs a deeper hole that will be harder to climb out of,” he said an industry event.
Fed officials have said they will start to assess banks’ Libor transition plans as part of the regular examination process. The Securities and Exchange Commission on Friday also called on financial companies to stop using Libor.
Speaking at the same event, the chief executive of the U.K.‘s Financial Conduct Authority said that markets should not assume there can be any easy way of dealing with the “tough legacy” of contracts still referencing Libor after the end of 2021. Some market participants have said that legislation could be used to underpin an adapted form of Libor or offer “safe harbours” for users of industry solutions, according to the FCA’s Andrew Bailey.
“Please do not rely on a legislative solution,” he said.
Banks will need to show they have a “fallback” to Libor after that deadline if they are not using the new risk-free rates like SOFR and Sonia as there is no certainty that Libor will continue after 2021, Bailey said.
“Even if Libor does continue for a further period after end-2021, it would have changed. There is a high probability it will no longer pass regulatory tests of representativeness.”
(Reporting by Trevor Hunnicutt in New York and Huw Jones in London; Editing by Chizu Nomiyama)