LONDON, May 3 (Reuters) - A global accounting standard setter has proposed a fast-track temporary fix to help banks and businesses manage Libor-based contracts worth $400 trillion during the transition to alternative interest rate benchmarks.
Regulators have set a December 2021 deadline for effectively ending the use of the London Interbank Offered Rate after banks were fined billions of dollars for trying to rig the benchmark.
But uncertainty over how to treat outstanding Libor-based contracts for accounting purposes is threatening a smooth transition to new rates.
Companies and banks buy Libor-based contracts to hedge or shield themselves against unexpected moves in interest rates hitting their bottom line, but the current accounting complexity may put them off hedging risks.
The International Accounting Standards Board (IASB), whose book-keeping norms are mandatory in over 100 countries, including the European Union, said on Friday it was proposing to change the wording of its rule on hedge accounting.
The existing IASB rule requires assessment of future cash flows from the contracts, something difficult to calculate given the lack of clarity on which interest rate will be referenced later on in a contract that can span years.
“This proposal is saying that you can assume your cash flows will be unchanged as a result of the interest rate benchmark reform and that it’s business as usual,” said Sue Lloyd, vice chair of the IASB.
The proposal is being put out to public consultation with the amendment due later in 2019.
“Once we have clarity about what the new rates are, then we will assess if further changes to our standards are needed. This is just dealing with issues before contracts get changed,” Lloyd said.
JPMorgan said in a note to clients this week that phasing out the use of Libor was arguably the biggest challenge facing global finance.
“Embedded in the plumbing of markets for more than three decades, the benchmark is rooted in everything from consumer contracts to $190 trillion of U.S. dollar interest rate derivatives,” the bank said.
The Federal Reserve and Britain’s Financial Conduct Authority last month urged users of Libor to speed up the switch to alternative rates.
The shift is gathering pace in the derivatives market but for cash contracts like loans, there is already talk among participants that a delay to the end of 2021 deadline is inevitable.
The aim is to whittle down the number of outstanding contracts using Libor to the smallest number possible by the end of 2021.
Reporting by Huw Jones; Editing by Kirsten Donovan