Bank of England threatens to use 'tools' to scrap Libor

The Bank of England and the FCA (Financial Conduct Authority) have told banks they have until September 2020 to stop issuing cash products linked to Libor (London Interbank Offered Rate). The regulators have written to major UK banks and insurers setting out their initial expectations and to market makers, encouraging them to switch by 2 March 2020 to help progress transition in the derivatives market.

The 2012 Wheatley Review found that the benchmark rate had been manipulated and banks were fined around £6.9bn (approx $9bn, €8bn) for their part in the scandal.

The Bank of England and FCA have now said that banks must replace Libor with Sonia (Sterling Overnight Index Average), which is based on actual transactions and reflects the average of the interest rates banks pay to borrow sterling overnight from other financial institutions. The regulators have warned they could force banks and insurers to hold more capital or use what they described as “supervisory tools” to encourage them to make the transition.

It’s thought that around $350tr worth of global financial contracts underpinned by Libor will need to be released to the new reference rate.

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