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

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.”


Investors, scientists urge IEA to take bolder climate stance

Updated 30 May 2020

Investors, scientists urge IEA to take bolder climate stance

  • The energy agency’s head is under pressure to align its policies with the 2015 Paris accord goals

LONDON: Fatih Birol, the head of the International Energy Agency (IEA), faced renewed calls to take a bolder stance on climate change on Friday from investors concerned the organization’s reports enable damaging levels of investment in fossil fuels.

In an open letter, investor groups said an IEA report on options for green economic recoveries from the coronavirus pandemic, due out in June, should be aligned with the 2015 Paris accord goal of capping the rise in global temperatures at 1.5C.

The more than 60 signatories included the Institutional Investors Group on Climate Change, whose members have €30 trillion ($33.42 trillion) of assets under management, scientists and advocacy group Oil Change International.

“Bold, not incremental, action is required,” the letter said.

The Paris-based IEA said it appreciated feedback and would bear the letter’s suggestions in mind. It also said it had been recognized for leading calls on governments to put clean energy at the heart of their economic stimulus packages.

“We have backed up that call with a wide range of analysis, policy recommendations and high-level events with government ministers, CEOs, leading investors and thought leaders,” the IEA said.

Birol has faced mounting pressure in the past year from critics who say oil, gas and coal companies use the IEA’s flagship World Energy Outlook (WEO) annual report to justify further investment — undermining the Paris goals.

Birol has dismissed the criticism, saying the WEO helps governments understand the potential climate implications of their energy policies, and downplaying its influence on investment decisions.

FASTFACT

1.5°C

The 2015 Paris accord aims to cap the rise in global temperatures at 1.5C.

But campaigners want Birol to overhaul the WEO to chart a more reliable 1.5C path. The world is on track for more than double that level of heating, which would render the planet increasingly uninhabitable, scientists say.

The joint letter followed similar demands last year, and was published by Mission 2020, an initiative backed by former UN climate chief Christiana Figueres.