Banks Smooth Libor's Demise With Term Rates for Bonds and Loans

(Bloomberg) -- Traders, drop the phones and go electronic if you want to move past the Libor scandal.

That’s the message from a finance industry-led panel charged with helping the U.K. replace the London interbank offered rate. Using the group’s chosen alternative will require lots of reliable, transparent price data, the kind generated by regulated electronic trading platforms. Voice broking just won’t cut it.

The panel, which brings together executives from firms including Barclays Plc, Intercontinental Exchange Inc. and BlackRock Inc., said the extra data are needed so the alternative rate, the Sterling Overnight Index Average, can be used in debt markets for products with longer maturities that stretch to months or years.

While there’s plenty of trading in the Sonia overnight index swaps market to support such term rates, price data aren’t readily available to the broader market, the panel said. So production of these rates requires moving from a predominantly voice over-the-counter market in overnight index swaps to “one more frequently traded on regulated electronic platforms, which will be a more transparent and verifiable data source,” the panel said.

The working group said the new term rates could be available in the second half of next year. In addition to industry representatives, meetings of the working group are also attended by officials from the BOE and the Financial Conduct Authority.

The clock is ticking on Libor, with regulators pushing banks, insurers and asset managers to abandon the benchmark by the end of 2021. The bulk of the market tied to Libor -- most interest-rate derivatives -- doesn’t need term rates, according to FCA chief Andrew Bailey. But smaller corporations and the syndicated loan market may need new rates to make the transition to Sonia, he said.

The working group has “identified operational challenges which could inhibit the use of an overnight rate by users in loan and debt capital markets,” it said in the consultation paper. The development of term Sonia reference rates “for use in these markets can therefore play an important role in facilitating transition” away from Libor, it said.

For decades, Libor was a seemingly reliable benchmark set daily by banks to determine interest rates on everything from student loans and mortgages to derivatives and credit cards. That all changed when European and U.S. banks were found to have manipulated rates to benefit their own portfolios, tainting the benchmark’s reputation.

©2018 Bloomberg L.P.