Financial groups that rely on US dollar Libor will have longer to break away from the scandal-tainted interest rate that underpins $200tn in contracts under a new plan announced on Monday by its administrator.
IBA, which compiles and oversees Libor, said it intended to cease publication of one-week and two-month US dollar Libor at the end of 2021. It will, however, extend the publication of the other more widely used US dollar Libor benchmarks until June 30, 2023, subject to consultation.
The administrator had already announced that it would consult the market about ending the publication of all Libor rates in sterling, Swiss franc, the euro and yen at the end of next year, with the US dollar rate conspicuously absent from the list.
It marks a shift in the approach to cease use of the interest rate benchmark that was at the centre of rate-rigging scandals a decade ago.
The transition away from US dollar Libor had raised concerns about a sudden end to the crucial lending rate once banks are no longer compelled by regulators to submit it after next year, potentially jeopardising financial stability.
Rather than switching existing contracts to a new rate, policymakers hope the extension will allow the bulk of contracts to simply come to an end.
“Today’s plan ensures that the transition away from Libor will be orderly and fair for everyone — market participants, businesses, and consumers,” said Randal Quarles, vice-chair for supervision at the Federal Reserve.
US regulators urged banks not to enter into new Libor transactions after 2021 to ensure that the scale of the challenge to transition contracts would have been sufficiently reduced by June 2023.
“Given consumer protection, litigation, and reputation risks, the agencies believe entering into new contracts that use [Libor] as a reference rate after December 31, 2021 would create safety and soundness risks,” wrote the Fed Board of Governors in a joint statement with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
Plans had previously focused on introducing “fallback language” to assign a new interest rate to contracts that currently reference Libor but concerns had been raised over the slow progress of the transition.
But even with this shift, some contracts will remain that will need to be moved to a new rate. The transition has been slower than for other currencies, in part because it is set to be replaced by an entirely new rate — the Secured Overnight Financing Rate — rather than an alternative but existing rate.
“New contracts entered into before December 31, 2021 should either utilise a reference rate other than Libor or have robust fallback language that includes a clearly defined alternative reference rate after Libor’s discontinuation,” the agencies added in their joint statement. “These actions are necessary to facilitate an orderly — and safe and sound — Libor transition.”
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