FCA Chair Comments on LIBOR Phaseout

Photo: Israeli Securities Authority Head Shmuel Hauser and the Head of the UK Financial Conduct Authority Andrew Bailey

With the nearing end of the LIBOR benchmark, the FCA’s CEO, Andrew Bailey, had some comments to make on the development. Back in April, the US Federal Reserve Bank of New York started to publish the Secured Overnight Funding Rate (SOFR), which will replace the London benchmark.

With the new overnight rate based on daily repo transactions, the lending market is facing a significant change. In his speech at the LIBOR transition briefing, he said that the progress in derivatives and securities markets has been steady, with the lending markets being the next challenge.

LIBOR panels are expected to disappear after the end of 2021. One of the main challenges for the industry is to phase out so-called legacy contracts which are contingent on the value of the benchmark after that date.

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“The base case assumption should be that there will be no LIBOR publication after end-2021.”

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“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,” Bailey explained.

The liquidity on markets that are relying on LIBOR-related contracts is likely to dry up, and it may not be suitable for new contracts. Bailey elaborated that the ability to hedge outstanding LIBOR obligations and claims is also likely to be impaired. In his speech to at the LIBOR transition briefing in New York, the CEO of the FCA recommended that firms transition as rapidly as they can.

“I can offer no certainty to those who have not taken steps to move off LIBOR by end-2021. Many market participants strive for certainty in their contractual arrangements. In order to achieve it, you do need to transition,” Bailey said.

Since regulators are expecting panel bank departures from the LIBOR panels at end-2021, the best case assumption for firms’ planning should be no LIBOR publication after end-2021. According to Bailey, so many banks may leave the LIBOR panels at end-2021 that it is simply not feasible to produce a rate based on panel submissions any longer.