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.”


US eases restrictions on China’s Huawei to keep networks, phones operating

Updated 43 min 18 sec ago
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US eases restrictions on China’s Huawei to keep networks, phones operating

  • The company is still prohibited from buying American parts and components to manufacture new products without license approvals
  • Out of $70 billion Huawei spent buying components in 2018, some $11 billion went to US firms
WASHINGTON: The US government on Monday temporarily eased some trade restrictions imposed last week on China’s Huawei, a move that sought to minimize disruption for the telecom company’s customers around the world.
The US Commerce Department will allow Huawei Technologies Co. Ltd. to purchase American-made goods in order to maintain existing networks and provide software updates to existing Huawei handsets.
The company is still prohibited from buying American parts and components to manufacture new products without license approvals that likely will be denied.
The US government said it imposed the restrictions because of Huawei’s involvement in activities contrary to national security or foreign policy interests.
The new authorization is intended to give telecommunications operators that rely on Huawei equipment time to make other arrangements, US Secretary of Commerce Wilbur Ross said in a statement.
“In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks,” Ross added.
The license, which is in effect until Aug. 19, suggests changes to Huawei’s supply chain may have immediate, far-reaching and unintended consequences for its customers.
“The goal seems to be to prevent Internet, computer and cell phone systems from crashing,” said Washington lawyer Kevin Wolf, a former Commerce Department official. “This is not a capitulation. This is housekeeping.”
Huawei, the world’s largest telecommunications equipment maker, declined to comment.
The Commerce Department said it will evaluate whether to extend the exemptions beyond 90 days.
On Thursday, the US Commerce Department added Huawei and 68 entities to an export blacklist that makes it nearly impossible for the Chinese company to purchase goods made in the United States.
The government tied Huawei’s addition to the “entity list” to a pending case accusing the company of engaging in bank fraud to obtain embargoed US goods and services in Iran and move money out of the country via the international banking system. Huawei has pleaded not guilty.
Reuters reported Friday that the department was considering a temporary easing, citing a government spokeswoman.
The temporary license also allows disclosures of security vulnerabilities and for Huawei to engage in the development of standards for future 5G networks.
Reuters reported Sunday that Alphabet Inc’s Google suspended business with Huawei that requires the transfer of hardware, software and technical services except those publicly available via open source licensing, citing a source familiar with the matter.
Google did not immediately respond to a request for comment on the new authorization.
Out of $70 billion Huawei spent buying components in 2018, some $11 billion went to US firms including Qualcomm Inc. , Intel Corp. and Micron Technology Inc.
“I think this is a reality check,” said Washington trade lawyer Douglas Jacobson. “It shows how pervasive Huawei goods and technology are around the globe and if the US imposes restrictions, that has impacts.”
Jacobson said the effort to keep existing networks operating appeared aimed at telecom providers in Europe and other countries where Huawei equipment is pervasive.
The move also could assist mobile service providers in thinly populated areas of the United States, such as Wyoming and eastern Oregon, that purchased network equipment from Huawei in recent years.
John Neuffer, the president of the Semiconductor Industry Association, which represents US chipmakers and designers, said in a statement that the association wants the government would ease the restrictions further.
“We hope to work with the administration to broaden the scope of the license,” he said, so that it advances US security goals but does not undermine the industry’s ability to compete globally and remain technology leaders.
A report on Monday on the potential impact of stringent export controls on technologies found that US firms could lose up to $56.3 billion in export sales over five years.
The report, from the Information Technology & Innovation Foundation, said the missed opportunities threatened as many as 74,000 jobs.
Wolf, the former Commerce official, said the Huawei reprieve was similar to action taken by the department in July to prevent systems from crashing after the US banned China’s ZTE Corp, a smaller Huawei rival, from buying American-made components in April.
The US trade ban on ZTE wreaked havoc at wireless carriers in Europe and South Asia, sources told Reuters at the time.
The ban on ZTE was lifted July 13 after the company struck an agreement with the Commerce Department that included a $1 billion fine plus $400 million in escrow and replacement of its board of directors and senior management. ZTE, which had ceased major operations as a result of the ban, then resumed business.
(Reporting by Karen Freifeld in New York and David Shepardson in Washington; Additional reporting by Diane Bartz in Washington and Angela Moon; Editing by Lisa Shumaker and Cynthia Osterman)