Derivatives industry asks regulators to clarify Libor phase-out terms
LONDON, Dec 4: A global derivatives industry body said on Wednesday it would try again to find consensus on helping regulators ditch the tarnished Libor benchmark - but only after regulators spell out exactly what they have in mind.
Investment banks have been fined billions of dollars for trying to rig Libor, or the London Interbank Offered Rate, an interest rate benchmark used to price contracts worth about $300 trillion from home loans to credit cards.
Regulators like the Financial Conduct Authority in Britain want markets to stop using Libor by the end of 2021 and switch to "safer" or less easily rigged alternatives, like the Bank of England's Sonia rate, or Sofr compiled by the Federal Reserve.
Ditching Libor is one of the biggest changes ever undertaken by markets.
The Financial Stability Board (FSB) of regulators and central bankers from the world's main financial centers, wants the derivatives industry to insert a mandatory "fallback" clause into swaps contracts that still reference Libor.
This would mean a mandatory switch from Libor if Britain's Financial Conduct Authority ruled that it was no longer "representative" even though it was still being published, or if Libor permanently ceased to exist on or after the end of 2021.
The derivatives industry, however, lacks consensus on how to deal with Libor becoming unrepresentative.
Last month the FSB called on ISDA, a global derivatives industry body, to try again to find agreement on such a "fallback" to include in contracts and combine it with a fallback for a Libor ending permanently.
ISDA told the FSB in a letter on Wednesday that it would consult its members again "once the market has the benefit of appropriate clarity" from regulators and clearing houses on two points. -Reuters