Ask us first before we change Libor with a “risky” rate, says Reuters, Britain’s guardian

By the hand of Huw Jones

LONDON (Reuters) – Banks should ask the Financial Conduct Authority to replace Libor, which is being suspended in December, before using “sensitive credit rates”, the guard said on Monday.

The Inter-Bank Offered Rate or Libor in London is being removed after banks are fined for trying to manipulate rates worth $ trillion worth of mortgages, loans and derivatives across various currencies around the world.

Most contracts are shifting to “risk-free” overnight rates set by central banks, such as the US Federal Reserve’s Sofr and the Bank of England’s Sonia.

But some market participants, especially in the U.S., plan to use “sensitive credit” rates based on transactions based on commercial paper and certificates in the deposit markets.

“We urge UK market participants who want to use these so-called‘ sensitive credit ’rates in UK business to carefully consider the risks and raise them with FCA officials before doing so,” said Edwin Schooling Latter, FCA Director of Markets and Wholesale Policy. on Monday at a UK Financial event.

Liquidity in markets that support sensitive credit rates has dried up and in March 2020 yields increased in the market turmoil as economies plunged into pandemic closures, he said.

“So these rates seem pretty benign in‘ normal ’market conditions. But lenders can have a painful misfortune in times of stress,” Schooling Latter said.

“The good news is that most of the dollar swap market positions will move to Sofr, not to these risky alternatives.”

While the new products are making reference to Sonia in the UK, there was still a lot of work to be done to change the excellent contracts and Schooling Latter asked them to complete the market by the end of the third quarter.

“It will help us avoid the risks of getting caught in the pre-Christmas rush. We could see a tightening in computing, legal or other resources, or we would simply have little time to adapt to unexpected obstacles,” he said.