April 10, 2019 / 4:09 PM / 5 months ago

Fed urges U.S. financial industry to accelerate Libor transition

WASHINGTON (Reuters) - The U.S. financial industry must accelerate efforts to move away from the scandal-plagued Libor reference interest rate, Federal Reserve Governor Randal Quarles said on Wednesday, adding that the regulator was scrutinizing banks’ transition plans.

FILE PHOTO: Federal Reserve Vice Chairman for Supervision Randal Quarles addresses the Economic Club of New York in New York City, U.S., October 18, 2018. REUTERS/Brendan McDermid/File Photo

The United States, Britain and other key markets have until the end of 2021 to replace the dominant Libor money market rate - the reference rate for more than $350 trillion of assets globally - which is being phased out after a series of manipulation scandals that led to banks being fined billions of dollars.

The global financial industry has been slow to embrace the change, with Reuters reporting in October that U.S. investors are unprepared for the transition to the Secured Overnight Financing Rate (SOFR), which they do not see as a pressing issue.

Speaking at an event hosted by the U.S. derivatives regulator in Washington, Quarles warned that major new markets such as SOFR “do not arise overnight” and can take decades to develop.

“We have only a little over two and a half years until the point at which Libor could end, and the transition needs to continue to accelerate. The private sector needs to take on this responsibility, and we expect you to do so,” said Quarles, who is also chair of the Switzerland-based Financial Stability Board.

HOTTER SPRING

Quarles was joined by regulators from Britain who are visiting Washington this week as part of the spring meetings of the International Monetary Fund and World Bank.

Industry hopes for more transition time were quashed by Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, who said that requiring banks to support a “fragile” Libor beyond 2021 was “not appropriate”.

But tax and accounting issues needed tackling so that the “irreducible core” of hard-to-transition Libor contracts would be as small as possible for tackling later, Bailey said.

He could not rule out that some “legacy” products might still refer to Libor after 2021, but new products should not.

The FCA and Bank of England are making senior bank officials personally responsible for timely transition from Libor to the BoE’s Sonia overnight rate.

“It seems as if we are in the spring for the transition in sterling markets. There are green shoots, but there is also a need for further rapid growth and for a heating up in activity,” said Bank of England Deputy Governor David Ramsden.

Quarles, who also oversees prudential regulation at the central bank, added that the Fed’s supervisory teams were including the transition away from Libor as part of their regular monitoring of large firms.

“The Federal Reserve will expect to see an appropriate level of preparedness at the banks it supervises,” he said.

Reporting by Michelle Price and David Milliken, additional reporting by Huw Jones in London; Editing by Andrea Ricci and Kevin Liffey

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