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Global Regulators Push for Faster Transition Away From Libor

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07/12/2018 | 06:49pm CEST

By Gabriel T. Rubin

WASHINGTON -- Global regulators made a coordinated push Thursday urging banks and traders to hasten their transition away from using the scandal-plagued London interbank offered rate.

In meetings and speeches around the world, regulators pressed banks to cease launching new contracts that reference Libor, and to come up with a plan for legacy contracts that will expire after the agreed-on transition date away from Libor, at the end of 2021.

Though some aspects of the transition are proceeding according to schedule, or even faster, U.K. Financial Conduct Authority Chief Executive Andrew Bailey warned in a speech in London that overall, "the pace of that transition is not yet fast enough."

Switching won't be easy. Libor, which has been deeply embedded in financial markets for decades, is used to set rates for hundreds of trillions of dollars of derivatives and other borrowings, including loans to consumers, companies and governments.

Legacy contracts represent arguably the greatest challenge for regulators and industry groups. Some $170 trillion in outstanding swap contracts are based on Libor, including a third that are set to mature after the 2021 transition date, Mr. Bailey said. Making matters more complex, some traders continue to launch new Libor-based contracts, despite warnings from regulators about the benchmark's pending disappearance.

"We need to reduce the stock of contracts that reference U.S. dollar Libor if the risks are to be fully addressed," said David Bowman, a senior Federal Reserve official, at a Commodity Futures Trading Commission meeting about Libor on Thursday.

The Financial Stability Board, a group of international regulators that is co-chaired by Fed Chairman Jerome Powell, underscored the need for new reference rates to be "anchored in active, liquid underlying markets" in a statement coinciding with the CFTC meeting and Mr. Bailey's speech.

Also on Thursday, the International Swaps and Derivatives Association began a consultation with market stakeholders to discuss a unified transition plan for contracts that are set to expire after 2021, which is when banks are set to stop submitting the data that helps determine Libor each day. ISDA is also working on a transition process for fallback rates that would serve as a backstop for legacy contracts that use Libor.

Movement away from Libor depends largely on the viability of an alternative reference rate to replace it. Regulators expressed optimism about the development of the Fed's Alternative Reference Rate Committee's chosen replacement, the secured overnight financing rate, or SOFR, which began publishing April 3.

CME Group Inc., a major derivatives exchange and clearinghouse, launched SOFR futures in May, and LCH, part of the London Stock Exchange Group, recently began offering clearing of swaps based on SOFR. Regulators and market participants alike view these developments as key barometers of liquidity growth that is crucial to the health of a new benchmark.

"These are signs that market infrastructure is evolving to accommodate SOFR which is critical," Robert Mangrelli, a director at Chatham Financial, said at Thursday's CFTC meeting. "The next question is when will liquidity for SOFR products develop."

Libor's integrity was called into question after a rate-rigging scandal where traders at numerous banks were able to nudge it up or down by submitting false data. Banks were fined billions of dollars and several traders were sent to prison. Since 2012, Libor has been under the supervision of U.K. regulators.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com

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