By Huw Jones

By Huw Jones

 

LONDON (Reuters) - A substitute for the widely-used Libor interest rate benchmark should be in place by the end of 2021, the head of Britain's financial markets watchdog said.

 

Libor is based on submissions from banks of interest rates they believe they would be charged by others for borrowing money. Banks have been fined billions of dollars for trying to manipulate the benchmark, forcing a rethink of its future.

 

The benchmark is used to price financial contracts worth $350 trillion, ranging from home loans to credit cards, globally and Bank of England Governor Mark Carney said this month it should in future be based on actual market transactions and not banks' judgments.

 

Andrew Bailey, chief executive of the Financial Conduct Authority, told an event in London on Thursday that work must "begin in earnest" on shifting to an alternative index, saying the end of 2021 would offer time to ensure a smooth transition.

 

"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."

Libor has to be replaced because there are too few transactions underpinning it, Bailey said, adding just 15 were executed in the whole of 2016 for one variant of Libor.

"In our view it is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them," Bailey said.

The BoE has already been refining its overnight sterling funding rate SONIA, which is based on actual transactions and therefore seen as harder to manipulate, as a Libor substitute.

The Federal Reserve is developing a home-grown substitute for dollar Libor, and the European Central Bank is examining similar moves to reform or replace Euribor, a euro-denominated version of Libor.

(Reporting by Huw Jones; editing by Edmund Blair and Alexander Smith)