Becoming LIBOR contributor may take up to 21 months – UK banks tell FCA
The banks generally agreed with the FCA that becoming a LIBOR contributor implies a one-off cost of around £3.5 million.
The UK Financial Conduct Authority (FCA) has earlier today published its Policy Statement in relation to LIBOR contributions. In this Policy Statement (PS), the FCA feeds back on the responses received to its Consultation Paper 17/15. Let’s recall that in this CP, the FCA consulted on the way in which it would use powers to compel banks to contribute to LIBOR.
Since the CP was published, the FCA has announced that the 20 current LIBOR panel banks have agreed to continue to submit to LIBOR until end-2021. The FCA has also said that it is its intention that, at the end of this period, it will no longer be necessary for the FCA to compel submissions because of progress on transition to alternative benchmarks.
The Policy Statement, published today, sets out the approach, criteria and methodology that the FCA proposes to apply if use of these powers was to become necessary, for example if the agreement with the current panel banks was not in place, or if the agreed period in which to transition to other rates was not available. However, these proposals are based on current circumstances and market conditions.
As a result of the feedback received, the FCA said it would consider the time and costs associated for a new bank becoming a LIBOR contributor. Around half of the respondents offered estimates of the time it would take for a new contributor to be able to provide input data. These ranged from 10-12 weeks, if contributing transactions only, to 21 months. Most responses were in the range 6 to 12 months.
The FCA had also asked about the costs of becoming a contributor. The FCA CBA had estimated a one-off cost of around £3.5 million, and an annual cost of around £2.4 million. Respondents generally agreed that these were reasonable estimates or offered their own estimates that were not very different.
Regarding the approach to compel, some respondents supported the idea of compelling contributions to fewer than all 7 of the existing tenors, given that the benefits of the less used tenors did not justify the extra costs to the banks. A similar number of respondents opposed that idea. They argued that all the rates were important, and that IBA surveys of users had shown strong demand for all tenors. Some responses said that compulsion should be limited to the currency rates that were most important.
The FCA says that if it needs to compel, it will consider whether to treat the different currencies and tenors differently in light of the circumstances at the time.
In addition, the FCA notes that exposure to LIBOR does not seem like a good indicator of participation in the underlying market, but could indicate the banks that would have the greatest conflict of interest as contributors to LIBOR.
This Policy Statement explains the methodology the FCA would expect to use if the regulator needed to compel one or more banks to contribute to LIBOR. At this stage, the FCA does not expect to need to use it.
