The publication of Libor (London Interbank Offered Rate) would finish on Dec 31 for Sterling, Euro, Swiss Franc and Japanese Yen, said The Financial Conduct Authority (FCA) recently.
In addition, one-week and two-month US dollar settings will also end at that time, according to the authority.
As a result, banks will no longer need to feed daily numbers in to Libor’s calculation from Jan 2022.
According to the FCA, banks will have time — until June 2023 — to extricate themselves from US$200 trillion of contracts tied to Libor. The decision follows a consultation in Dec 2020 led by ICE Benchmark Administration, which compiles and oversees the daily rate.
“Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable Libor rates and build a more robust foundation for the financial system,” said Andrew Bailey, governor of the Bank of England.
Why Libor is scrapped
Libor has been used widely as a reference rate in a range of financial products and instruments for more than 40 years.
Financial regulators have tried to scrap Libor across North America and internationally as a result of allegations regarding the manipulation of reference rate during the previous financial crisis more than a decade ago.
However, the move to new benchmarks is a monumental global change impacting lending, bond and derivative contracts in major currencies across almost all industries, requiring significant efforts by businesses to address the impacts on key activities, client interactions, control processes, systems, risk management, and financial performance.
Like the case in other currencies, the US replacement is also a new rate instead of an enhanced existing rate.
How Singapore, Hong Kong are transitioning to new rates
Singapore is moving to a new rate — the Singapore Overnight Rate Average — from the Singapore Offered Rate which relies on Libor.
"This will allow about 70% of existing stock of legacy SOR cash products, or about S$65 billion (US$48 billion) of bilateral and syndicated loans, to mature before the new deadline," said Leong Sing Chiong, deputy managing director (markets & development) of Monetary Authority of Singapore (MAS) recently.Hong Kong’s and Australia’s domestic benchmarks, Hibor and BBSW, are staying, but regulators warn their banks are still exposed to Libor. Hong Kong is also developing an alternative rate.
In Hong Kong, the Hong Kong Interbank Offered Rate (Hibor) has been in use for many years, widely recognised by market participants.
While the Hong Kong Dollar Overnight Index Average (Honia) has been identified as an alternative to HIBOR, there is no plan to discontinue HIBOR, said the Hong Kong Monetary Authority (HKMA) late last year, adding that this multi-rate approach has also been adopted by many other jurisdictions.
As of Sep 2020, there were HK$4.8 trillion (US$618 billion) of assets and HK$1.4 trillion (US$180 billion)of liabilities in the Hong Kong banking system referencing Libor, representing about 30% and 10% respectively of the banking system’s total assets and total liabilities denominated in foreign currencies, according to HKMA numbers.
In addition, there were derivatives contracts involving an aggregate amount of HK$31.6 trillion (US$4 trillion) in notional value referencing Libor, HKMA noted.
More than 40% of these Libor-linked assets and liabilities, and about 60% of these derivatives contracts would mature after end-2021 and did not have adequate fallback provisions to cater for a scenario of Libor discontinuation, HKMA pointed out.
The HKMA said that the Hong Kong banking sector has made good progress in preparing for the transition from Libor to alternative reference rates, with most authorised institutions having started to offer alternative-reference-rate (Arr) products and included fallback provisions in new Libor contracts.
“In the remaining time before end-2021, authorised institutions are expected to accelerate their work on reducing their reliance on Libor,” the HKMA said. “We will continue to follow up with them where necessary to ensure a smooth transition from LIBOR to Arrs.”