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The City of London financial area may be seen as people walk along the south side of the River Thames in London, Britain, on March 19, 2021, during the coronavirus illness (COVID-19) outbreak. Henry Nicholls/Henry Nicholls/Henry Nicholls/Henry Nicholls (Reuters) – LONDON, July 5 (Reuters) – Before implementing “credit sensitive rates” to replace Libor, the tainted benchmark that will be phased out in December, banks should consult the Financial Conduct Authority, the watchdog said on Monday. The London Interbank Offered Rate, or Libor, is being phased out after banks were punished for attempting to manipulate the rate to price trillions of dollars in mortgages, loans, and derivatives in several currencies throughout the world. The majority of contracts are being shifted to “risk-free” overnight rates compiled by central banks like the US Federal Reserve’s Sofr and the Bank of England’s Sonia. However, some market participants, particularly in the US, want to utilize “credit sensitive” rates based on commercial paper and certificate of deposit transactions. “Any regulated UK market participants looking to use these so-called ‘credit sensitive’ rates in UK-based business should carefully consider the risks and consult their FCA supervisors before doing so,” Edwin Schooling Latter, the FCA’s director of markets and wholesale policy, said at a UK Finance event on Monday. During market volatility in March 2020, when economies went into pandemic lockdowns, liquidity in markets underpinning credit sensitive rates dried up, and yields rose, he added. “In ‘normal’ market conditions, these rates may appear to be rather innocuous. “The good news is that the most of outstanding dollar swap market holdings will be moving to Sofr, not these risk-laden alternatives,” Schooling Latter said. “The bad news is that the bulk of outstanding dollar swap market positions will be transferring to Sofr, not these risk-laden alternatives.”” While new products in the UK are referencing Sonia, there is still work to be done in terms of switching outstanding contracts, which Schooling Latter advised markets to finish by the end of the third quarter. “It will help us avoid getting caught in a pre-Christmas rush,” he said, “when we might experience a pinch in IT, legal, or other resources, or simply have too little time to respond to unexpected barriers.” Huw Jones contributed reporting, while Alison Williams and Kirsten Donovan edited the piece. The Thomson Reuters Trust Principles are our standards./nRead More

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