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By Huw Jones
LONDON, Oct 7 (Reuters) - Markets must prepare for
announcements that the Libor interest rate benchmark will cease
at the end of 2021, Britain's Financial Conduct Authority said
on Wednesday.
Libor, or London Interbank Offered Rate, is used to price
contracts from derivatives and mortgages to company loans and
credit cards worth trillions of dollars globally, but it is
being scrapped after banks were fined for trying to manipulate
it.
"Market participants need to be ready for announcements
later this year setting out what will happen at the end of
2021," the FCA's director of markets, Edwin Schooling Latter,
told an online event.
Ending Libor is one of the biggest tasks for markets in
decades.
"The scenario that you need to be ready for is that those
are announcements of cessation," he told a conference organised
by the Association of Corporate Treasurers.
"The transition away from Libor has not been postponed
because of COVID-19."
This and the next quarter will be critical for switching
existing contracts to alternative rates, and using alternative
rates for all new contracts, he said.
Most sterling-denominated contracts will switch to the Bank
of England's overnight Sonia rate.
From earlier this month, banks were required to offer
customers non-Libor alternatives, and from the end of the first
quarter of 2021, Libor loans can no longer be offered.
Customers should check there are no gaps in hedging across
products if their derivatives and loans switch to Sonia at
different speeds.
"Looking at all of your exposures in the round... has to be
the starting place," said David McNally, a director at Deutsche
Bank.
Libor has "terms" stretching out months or years, but much
of Sonia usage will be based on "compounding" the rate over the
term of a contract.
"Everyone on the inside of this exercise is very confident
that the future centre of gravity of interest rates is going to
be those overnight rates compounded in arrears," Schooling
Latter said.
(Reporting by Huw Jones;
Editing by Alison Williams and Bernadette Baum)
