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By Huw Jones
LONDON, Feb 26 (Reuters) - The Bank of England told banks on
Wednesday to accelerate their efforts to ditch the Libor
interest rate benchmark if they want to avoid facing more
punitive terms when borrowing from the central bank.
The BoE wants Libor, which banks were fined billions of
pounds for trying to rig, replaced with the central bank's own
overnight "risk-free" Sonia rate by the end of 2021.
Market participants have started to use Sonia for new
futures contracts, but progress in the cash loans market has
been slower, with question marks over what happens to many
"legacy" contracts with terms that go beyond 2021.
Libor, available in sterling, dollar and other currencies,
is used to price contracts like home loans and credit cards
worth around $400 trillion globally.
"We need to see another decisive acceleration in effort in
2020 to ensure risk-free rates are adopted across the full range
of sterling business, and Libor is left behind for good," BoE
executive director for markets Andrew Hauser told an ISDA
derivatives industry conference.
Hauser said that from October, the Bank will start
increasing "haircuts" progressively on Libor-linked collateral
used by banks to borrow from the central bank, meaning more
collateral would be needed to cover the same amount borrowed. He
added that any Libor-linked collateral issued after October 2020
will be ineligible for use at the BoE.
The BoE will also publish a "compounded" Sonia index from
July to help the transition from Libor in loans.
"These initiatives are aimed at turbo-charging sterling
transition, helping the market deliver against its commitment to
transition away from Libor and further de-risking sterling
markets," Hauser said.
Libor is based on quotes submitted by a panel of banks and
its compilation has been reformed since the rigging scandal to
make manipulation harder.
But Hauser said the "chronic" lack of actual transactions
means that Libor is "simply too fragile a benchmark to support a
sustainable business model".
Its continued existence poses material risks to financial
stability, both in Britain and globally, Hauser said.
Market participants already face a deadline next month to
use Sonia in new futures contracts, with a third quarter
deadline for replacing Libor with Sonia in loans.
(Reporting by Huw Jones, editing by Carolyn Cohn and Emelia
Sithole-Matarise)
