UK watchdog tells banks to show plans for ending Libor use

Banks have been fined $9 billion for trying to rig Libor, a measure of borrowing costs among lenders, and the Bank of England has launched a supposedly risk-free alternative, its SONIA overnight rate, for use in contracts. (Reuters)
Updated 12 July 2018
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UK watchdog tells banks to show plans for ending Libor use

  • Banks have been fined $9 billion for trying to rig Libor, a measure of borrowing costs among lenders
  • Risk-free rates are considered harder to manipulate as they are based on actual market transactions

LONDON: Banks must show how they plan to shift from using Libor in financial contracts to “risk-free” interest rate benchmarks by the end of 2021, Britain’s markets watchdog said on Thursday.
Banks have been fined $9 billion for trying to rig Libor, a measure of borrowing costs among lenders, and the Bank of England (BoE) has launched a supposedly risk-free alternative, its SONIA overnight rate, for use in contracts.
Risk-free rates are considered harder to manipulate as they are based on actual market transactions, as opposed to quotes submitted by “panel” banks to compile Libor.
But switching long-term contracts to SONIA is proving difficult in some cases, as Libor rates can stretch out several years rather than just overnight to price trillions of dollars in contracts globally from home loans to credit cards.
“The absence of ways to remedy the current underlying weakness in Libor – the lack of transactions, the unattractive prospect of Libor limping on with fewer panel banks, and the significant problems associated with a synthetic Libor, all lead to the same conclusion,” Financial Conduct Authority (FCA) Chief Executive Andrew Bailey said.
“The best option is actively to transition to alternative benchmarks. The most effective way to avoid Libor-related risk is not to write Libor-referencing business,” Bailey said in a speech at Bloomberg in London.
Gerard Jacob, a partner at Parker Fitzgerald law firm, said it was the strongest message yet that firms must initiate transition programs, backed by hints that regulators may not even allow the use of Libor after 2021.
Bailey set the end-2021 deadline for transition in a speech a year ago, but market participants have continued to accumulate Libor-linked sterling derivatives for periods well after 2021.
About $170 trillion of the interest rate swap contracts cleared by LCH, a London-based clearing house, reference Libor, and a little under one-third of these mature after the end of 2021, Bailey said.
In an effort to get banks to speed up migration to SONIA, he said financial firms in Britain will have to show the FCA and the BoE how they will reduce their dependency on Libor.
“Andrew Bailey has given his clearest signal yet to the market that the bell tolls for Libor,” said Mairead Duncan-Jones, capital markets lawyer at Linklaters.
“After this morning’s speech the ‘wait and see’ approach is not likely to be sufficient,” Duncan-Jones said.
Bailey said that in most cases the best solution was to use overnight rates rather than continue using Libor or an alternative rate compiled like Libor.
There are also “formidable” difficulties in creating a “synthetic” Libor that combines a risk-free rate and credit spreads, he added.
“It should be clear to current Libor users that they must not rest any hopes in a synthetic solution to continuing Libor publication.”


UAE property developers’ earnings give Gulf markets a boost

Updated 17 February 2019
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UAE property developers’ earnings give Gulf markets a boost

  • Real estate sector gets confidence boost
  • DAMAC gains despite 87 pct drop in Q4 net profits

DUBAI: Most stock markets in the Middle East closed higher on Sunday, reflecting a rally in global stock markets on Friday, and were also boosted by better-than-expected company results, particularly in real estate.

The Abu Dhabi index gained 0.7 percent and the Dubai index 0.6 percent, as two of the largest property developers in the United Arab Emirates posted positive fourth-quarter financial results last week that beat market expectations.

“The market is starting to rebuild confidence in earnings as a driver for sentiment,” said Arqaam Capital in a research note. “Sentiment on the UAE was very weak in 2018, specifically for real estate, on concerns over oversupply risk, pricing pressure that is leading to extended payment plans, and a rental yield compression that is continuing to fall,” Arqaam said.

“But Q4 numbers provided evidence that a few developers have emerged as winners (Emaar Co’s, Aldar) out of market consolidation.” Emaar Properties, Dubai’s largest listed developer, reported a 27 percent rise in fourth-quarter profit.

The stock rose 2 percent on Sunday. DAMAC Properties closed up 0.8 percent, despite having reported a nearly 60 percent fall in full-year profit and an 87 percent drop in fourth-quarter net profits.

In Abu Dhabi, Aldar Properties gained 3.6 percent. Last week, the developer reported a rise in fourth-quarter earnings and higher dividends for 2018. In other sectors, Abu Dhabi Islamic Bank rose 0.5 percent after saying it had no merger and acquisition plans. This was in response to a Bloomberg report last week which said the bank was considering such options.

The Saudi index closed 0.4 percent down, in contrast to the rest of the region’s markets. Arab National Bank reported an increase in full- year net profit to 3.13 billion riyals ($834.62 million) from 3.03 billion riyals one year earlier.

The stock remained unchanged and this failed to give support to the banking sector. Alinma Bank < 1150.SE> and Al Rajhi Banking & Investment Corp. lost 0.3 percent and 0.6 percent, respectively.

In Egypt, where the main index gained 1.4 percent, Orascom Investment Holding, up 3.2 percent, was among the stocks attracting the highest trading volume. Shares in the company jumped last week after its chairman, Egyptian billionaire businessman Naguib Sawiris, said he saw possible investment opportunities in North Korea if a summit between its leader Kim Jong Un and US President Donald Trump later this month was successful.

SAUDI The index lost 0.4 pct to 8,592 points ARABIA DUBAI The index rose 0.6 pct to 2,550 points ABU DHABI The index rose 0.7 pct to 5,070 points QATAR The index gained 0.7 pct to 10,011 points EGYPT The index rose 1.4 pct to 15,199 points KUWAIT The index gainedd 0.1 pct to 5,427 points OMAN The index was down 0.8 pct at 4,077 points BAHRAIN

The index went up 0.6 pct to 1,381 points ($1 = 3.7502 riyals)