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Regulators tell derivatives industry to find Libor consensus

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By Reuters

By Huw Jones

LONDON (Reuters) – Regulators have told the world’s derivatives market that it must find a common approach for dealing with a sudden death of Libor, the tarnished interest rate benchmark used for pricing contracts worth more than $300 trillion (£232 trillion) globally.

Libor became discredited after big investment banks were fined billions of dollars for trying to rig Libor or London Interbank Offered Rate, a benchmark that reflects the cost of borrowing among banks.

It is slowly being replaced with rates compiled by central banks, including Federal Reserve, the European Central Bank and the Bank of England, in one of the biggest changes that markets have ever undertaken.

Britain’s Financial Conduct Authority (FCA) has said that Libor is expected to cease after the end of 2021.

In preparation for the change, the Financial Stability Board (FSB) said on Tuesday in a letter to global derivatives industry body ISDA that a “pre-cessation trigger” should be inserted into terms for new derivatives contracts that still reference Libor.

It should spell out an alternative to Libor if regulators decided before the end of 2021 that the benchmark was no longer safe to use.

The FSB, made up of regulators, central bankers and treasury officials from the Group of 20 Economies (G20), said there should also be no “optionality”, meaning the trigger must be applied to avoid markets fragmenting.

ISDA consulted members earlier this year and most said they would not want to continue using Libor if regulators decided it was no longer safe – but there was no consensus on how this should be done.

Regulators told ISDA on Tuesday to try again.

“We believe it important for ISDA to find a way both to protect the derivatives market from a disruptive fragmentation and to accommodate the majority’s preferences as expressed in the consultation,” the FSB said in a letter signed by FCACEO Andrew Bailey and New York Fed President John Williams.

ISDACEO Scott O’Malia replied that the derivatives body had conducted multiple consultations over the past three years and would continue to work with the FSB and market participants to implement “fallbacks” for Libor.

Last month, O’Malia had called on regulators to spell out under what circumstances Libor would not longer be safe to use and for how long it could then still be published.

The FSB’s letter does not address these issues.

(Reporting by Huw Jones. Editing by Jane Merriman)