To set Libor, banks submit the rates at which they would be prepared to lend money to one another, on an unsecured basis, in various currencies and at varying maturities.
The Financial Conduct Authority would like the industry to shift to reference rates more closely tied to actual loan transactions within four to five years, rather than the current system of using the best guess of the participating submitting banks.
In his speech, Mr. Bailey cited what he called a “extreme example” in which about a dozen banks submitted a rate every day for a particular currency and maturity rate in which only 15 transactions of potentially qualifying size for that currency and maturity had been executed in 2016.
Following the Libor scandal, Intercontinental Exchange took over administration of the rate, in the hope of making it more transaction based. The administrator maintains a panel of 11 to 17 banks for each of the five currencies in which Libor is calculated: the British pound, the dollar, the euro, the Swiss franc and the Japanese yen.
Mr. Bailey said that the regulator had agreed with the panel banks to sustain Libor through 2021 in order to transition to new rates.
“This date is far enough away significantly to reduce the risks and costs of a more sudden change,” Mr. Bailey said. “By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counterparties and Libor users as is practicably possible in that planning.”
Source: New York Times