Libor unlikely to survive until 2025 due to thin market, Fed’s Bowman says

22 October 2018 2:24pm

19 October 2018. By Neil Roland.

US-dollar Libor may survive as a benchmark beyond official plans for its 2021 phaseout, but it is unlikely to last until 2025 because of its waning market, a senior US Federal Reserve official said.

David Bowman, head of the Fed-sponsored effort to transition away from the scandal-plagued benchmark, said it will be “a very hard slog” for Libor’s administrator to continue its publication for long.

“It is very unstable,” Bowman, a senior advisor to the Fed’s board of governors, said at a recent Washington conference*. “Maybe they can continue to produce it for some time past 2021. But to 2025 or 2030? Very, very difficult.”

Libor’s producer is Intercontinental Exchange’s ICE Benchmark Administration in London, which is overseen by the UK Financial Conduct Authority.

Another way Libor might die, Bowman said, would be for the Financial Conduct Authority to find the interest-rate benchmark “non-representative” because its market is so thin. That would preclude EU-supervised firms from trading new Libor swap or debt instruments.

“That would be very disruptive,” Bowman said. “It would make Libor much less useful even for US residents.”

Shrinking market

The market underlying Libor has been shrinking since the financial crisis. Without official intervention to stabilize it over the last 10 years, Bowman said, the benchmark wouldn’t have survived.

According to Fed estimates, there are about $500 million in transactions underlying banks’ US-dollar Libor submissions.

Bowman conceded that “there’s no certainty” about the timing of Libor’s demise. He leads the effort by the Fed-sponsored Alternative Reference Rate Committee, a private-sector panel, to transition to the Secured Overnight Financing Rate as a new benchmark for US dollar-based business.

Hester Serafini, head of an ICE clearinghouse, has said Libor will likely be continued beyond 2021 because of industry participants’ feedback in surveys that “they really want Libor to continue".

One reason Libor has industry backing is the large notional value of contracts outstanding on the interest-rate benchmark, she said.

FCA: 2021 deadline

FCA Chief Andrew Bailey has said a Libor substitute must be available for banks to use by the end of 2021. But he acknowledged the ICE Benchmark Administration could continue to publish Libor after 2021 if many banks that submit data were amenable.

In July, Bailey and Christopher Giancarlo, head of the US Commodity Futures Trading Commission, prodded market participants to accelerate plans to substitute nascent benchmarks for Libor in their contracts by 2021.

“The discontinuation of Libor is not a possibility,” Giancarlo said. “It is a certainty.”

US-dollar Libor is by far the biggest of the five currencies in which the benchmark is referenced.

*Bipartisan Policy Center “Reference Rate Reform: Impact on the Economy and Consumers”; Washington, D.C.; Oct. 11, 2018.

Fintech Regulation in 2018