Libor Moves to Its ‘Final Chapter’ as U.K. Sets End Dates

(Bloomberg) -- After decades at the heart of the international financial system, the much maligned London interbank offered rate is finally within sight of retirement.

The U.K. Financial Conduct Authority confirmed Friday that the final readings for most rates will take place on Dec. 31, with just a few set to linger for a further 18 months. Regulators have made a concerted effort to wind it down by the end of this year, with the Federal Reserve and others pushing market participants toward alternatives in the wake of major Libor manipulation scandals and the drying up of trading data used to inform the rates.

Libor underlies everything from bonds and leveraged loans to consumer credit cards and mortgages. Some $200 trillion of derivatives are tied to the U.S. dollar benchmark alone and most major global banks will spend more than $100 million preparing for the switch. Smaller players -- from hedge funds to non-financial corporates -- could also be caught in the crossfire, with many only at the beginning of the transition from legacy contracts.

Bank of England Governor Andrew Bailey said this was now the “final chapter” for Libor, saying firms don’t have any excuse to delay the work needed.

“With limited time remaining, my message to firms is clear -- act now and complete your transition by the end of 2021,” he said.

End in Sight

The decision locks in the benchmark’s fallback spread calculations, which for dollar Libor will be added to the Secured Overnight Financing Rate, or SOFR, the main U.S. replacement.

While speculation about the announcement’s timing jolted the eurodollar market in December, the market reaction to Friday’s announcement was subdued. The spread between June 2023 and September 2023 Eurodollars widened one basis point, as did the difference between December 2021 versus March 2022 short sterling contract.

The FCA repeated its long held view that the lack of an active underlying market makes Libor “unsustainable.” It said it and the BOE have been working with market participants and authorities around the world to ensure that contracts can move safely to alternatives to “safeguard financial stability and market integrity.”

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