Libor transition uncertainty prompts G-20 review of jurisdictions’ progress

19 February 2020 12:48 by Neil Roland

The possibility of a rocky Libor transition is prompting the Group of 20 economic powers to review the progress of 50 jurisdictions in moving away from the tarnished interest-rate benchmark.

"Some continue to speculate that Libor could remain in production indefinitely," Financial Stability Board Chairman Randal Quarles said in a letter today to G-20 finance ministers and central bank governors. "This speculation is misguided."

A press release accompanying today's letter said: "The official and private sectors have much to accomplish to ensure a smooth transition to a post-Libor world."

The UK's Financial Conduct Authority, which oversees the London Interbank Offered Rate, has warned it will stop guaranteeing banks' publication of the benchmark at the end of 2021. The thinly traded, scandal-plagued benchmark is written into trillions of dollars of financial contracts.

The FSB, the regulatory coordinator for the G-20, is joining with the Basel Committee for Banking Supervision in surveying the jurisdictions, said the letter from Quarles, who doubles as the US Federal Reserve's vice chairman for supervision.

The board will write two progress reports: one for the July G-20 meeting and another ahead of the November summit in Riyadh, Saudi Arabia.

Separately, US regulators — including the Treasury Department and Fed — met with the EU, European Central Bank and other European authorities last week to discuss the Libor shift as part of an ongoing discussion of various regulatory matters.

— Market participants' doubts —

Authorities worldwide are trying to address market participants' various doubts about alternatives to Libor.

US banks, with the support of regulators, are working together on a credit-sensitive alternative to Libor that would leave the Secured Overnight Financing Rate as the officially designated substitute, Fed Chairman Jerome Powell said last week.

"SOFR is going to be the rate that a lot of the derivatives go to and many, many across the broad financial system will go to," he said.

A number of investment managers have said they would be less likely to buy some cash products that reference SOFR because of its lower rate compared to Libor.

The US transition from Libor also is being resisted by some derivatives-trading firms that are failing to insert fallback rates into contracts relying on Libor, said Rostin Behnam, a US Commodity Futures Trading Commission member.

"There are still too many firms fighting the existing reality by failing to ensure that contracts that do rely on Libor have clear, effective fallbacks to address the prospective end of Libor," said Behnam, who sponsors an industry panel advising the CFTC on the transition.

UK banks and financial firms seen as lagging in the forced shift away from Libor got stiff caution from industry regulators last month: "The time to act is now."

There must be an acceleration by UK financial-market participants that have been sluggish in moving toward new interest-rate benchmarks, the Financial Conduct Authority and Bank of England jointly warned.

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