'Big bang' end for Libor could overload markets, bankers say

Huw Jones
·2-min read

By Huw Jones

LONDON (Reuters) - A "big bang" end for interest rate benchmark Libor in December this year could leave banks and their customers struggling to switch trillions of dollars worth of transactions to an alternative, bankers said on Tuesday.

Libor, the London Interbank Offered Rate, used to price everything from mortgages and credit cards to derivative contracts, will be scrapped on Dec. 31 after banks were fined for trying to rig it.

Instead, rates set by central banks will replace Libor in the biggest change in global financial market in decades. One of the new benchmarks - known as Sonia - is set by the Bank of England.

A sudden end to Libor could risk legal limbo for some financial transactions that have not made preparations to switch to a new benchmark, potentially hampering the flow of money to businesses.

Chris Dickens, chief European operating officer at HSBC, said switching outstanding contracts from Libor to Sonia in one go at the last minute would be tricky.

"I am not sure that our operational systems could cope with that, either individually as a bank or in terms of the technology that we use to connect with each other," Dickens told a City & Financial conference.

Financial regulators have said that from April there should be no new loans and derivatives contracts based on Libor that mature after December, and that moving existing contracts from Libor should be well underway.

Some smaller customers are not ready.

"Key in this next phase is going to be the response from customers as we engage with them," said Ian Fox, Libor transition director at British bank Lloyds. "I don't know what we are really going to face until we get there, that's the challenge in the coming weeks and months."

"I think we are going to see a lot of thorny issues that really require some senior attention in our organisations," Dickens said.

Britain's Financial Conduct Authority said on Tuesday that 97% of sterling denominated derivative contracts now include "fallback" clauses to switch pricing to the Bank of England's Sonia overnight rate when Libor ends, to avoid legal limbo.

Some 12,500 banks and others across the world have signed up to this "fallback" clause, meaning $245 trillion of the $260 trillion in derivatives globally will be covered, the FCA said.

Edwin Schooling Later, the FCA's director of markets, said the watchdog will consult in the spring on which "hard legacy" contracts could use a "synthetic" Libor for pricing after December and those that could not.

"Overall we should paint a picture of good news and good progress, the industry has been rising to this challenge," Schooling Latter said.

(Reporting by Huw Jones. Editing by Jane Merriman)