(Reuters) – The Bank of England has stepped up efforts to replace the scandal-hit LIBOR interest rate benchmark with the SONIA measure of overnight rates as the main benchmark for commercial sterling interest rates by the end of 2021.
“It has become increasingly clear that we cannot rely on LIBOR in the long term,” BoE Governor Mark Carney said in a speech to bankers in London on Wednesday.
British regulators have already said they want a switch to SONIA by the end of 2021, and on Wednesday the BoE announced changes to ensure transition stays on track in the face of some market reluctance.
Carney said there was a risk that the banks which currently quote interbank lending rates that are used to calculate LIBOR might pull out and precipitate the benchmark’s collapse, which he added “raises obvious financial stability concerns”.
The Financial Conduct Authority announced a deal this month whereby banks have committed to submitting quotes for compiling LIBOR until the end of 2021.
LIBOR – a measure of interbank lending rates for various time periods – is used as the basis for trillions of pounds worth of contracts. But during the financial crisis, some traders manipulated the rate, leading to criminal convictions and huge fines for international banks.
The BoE said it would broaden a working group which would steer the transition away from LIBOR to include fund managers and non-financial companies that issue debt, as well as bankers.
Bank of England Deputy Governor for banking and markets Dave Ramsden said the change would “catalyse” transition to SONIA across a broad range of markets.
Barclays (BARC.L) chief compliance officer Francois Jourdain would remain chair of the group, aided by Shell (RDSa.L) finance executive Frances Hinden and Legal & General Investment Management’s (LGEN.L) Simon Wilkinson as vice-chairs.
“The transition to SONIA is necessary and not optional,” Jourdain said.
There is reluctance in parts of the market to switch to SONIA, with participants saying it is not appropriate for longer term contracts.
SONIA is an overnight rate, while Libor covers “terms” or periods going out decades into the future.
A key near-term priority for the working group will be to make recommendations relating to the potential development of term SONIA reference rates.
“This work is already underway and a public consultation is planned for the first half of 2018,” the BoE said.
Scott O’Malia, chief executive of ISDA, the global derivatives industry body, said it was incumbent on the industry to find solutions on transitioning.
“It’s not an option to fail,” O’Malia, a former U.S. derivatives regulator, said.