WEBVTT - Financial Conduct Authority Sets End Date for Libor (Audio) 0:00:00.080 --> 0:00:03.480 After nearly fifty years of being the global borrowing benchmark, 0:00:03.640 --> 0:00:07.280 the Library is being abandoned, buried in a financial grave, 0:00:07.400 --> 0:00:09.840 only to be found in history books that recount the 0:00:09.840 --> 0:00:13.480 tales of the scandals and corruption that generated some nine 0:00:13.480 --> 0:00:17.479 billion dollars in banking fines. UK regulators have decided that 0:00:17.520 --> 0:00:21.319 the benchmark that underpins more than three trillion dollars of 0:00:21.360 --> 0:00:25.240 financial products from car loans to mortgages will be phased out. 0:00:25.560 --> 0:00:28.640 Andrew Bailey, the head of the UK's Financial Conduct Authority, 0:00:28.680 --> 0:00:32.640 set on Bloomberg TV that libral isn't sustainable because of 0:00:32.680 --> 0:00:36.599 a lack of transactions providing data. So the assumption that 0:00:36.640 --> 0:00:38.920 we have a market and money as it were, which 0:00:38.920 --> 0:00:42.320 will support libral hasn't happened, and so the current structure 0:00:42.880 --> 0:00:45.800 in a sense depends excessively in our view, on expert 0:00:45.840 --> 0:00:48.839 judgment by the submitting backs. Billy says he wants to 0:00:48.880 --> 0:00:53.800 scrap library by one joining me is John Glover, Bloomberg 0:00:53.800 --> 0:00:58.800 News Financial regulation reporter. John start by explaining exactly what 0:00:58.880 --> 0:01:03.920 the London Interbank offered rate or libor is um. Well, 0:01:04.600 --> 0:01:09.880 it's yeah, it's a series of different call them in 0:01:09.959 --> 0:01:13.240 let's call them indexes. Or benchmarks that grew up over 0:01:13.640 --> 0:01:19.360 time organically as the euromarkets developed. That's the markets for 0:01:20.080 --> 0:01:25.120 um assets financial assets in Europe rather than the markets 0:01:25.160 --> 0:01:30.959 in Euros. Now, why, well, there's a series, there's a 0:01:30.959 --> 0:01:32.960 series of currencies in a series of what they call 0:01:33.040 --> 0:01:40.080 tenants maturities. Why this decision to drop libor, Well, the 0:01:40.120 --> 0:01:41.880 reason he grew up where it did and when it 0:01:41.880 --> 0:01:45.160 did is that banks needed to borrow from each other 0:01:45.440 --> 0:01:48.120 overnight or for three months or six months or whatever 0:01:48.960 --> 0:01:52.480 um in various currencies, and so they needed some kind 0:01:52.520 --> 0:01:54.920 of a benchmark. They don't borrow from each other much anymore. 0:01:55.000 --> 0:01:59.040 So there are the transactions, particularly in some currencies which 0:01:59.040 --> 0:02:03.800 are very adequate at some at some maturities. So there's 0:02:03.800 --> 0:02:06.520 no real transaction taking place. It's just a guess that 0:02:07.080 --> 0:02:09.919 the panels that say how much it would it would 0:02:09.960 --> 0:02:13.120 cost a prime bank to borrow from another prime bank 0:02:13.520 --> 0:02:16.560 for a certain amount of time, they're just pulling numbers 0:02:16.560 --> 0:02:19.040 out of the air. Really, I mean that's unfair, but 0:02:19.720 --> 0:02:22.760 because they're more closely policed than that. But then it's 0:02:22.840 --> 0:02:26.880 an estimate. So what happens now when there is no 0:02:27.040 --> 0:02:32.640 replacement for it, Well, they're building replacements slowly but surely. 0:02:33.120 --> 0:02:39.000 Um and the company which is ice that space I 0:02:39.080 --> 0:02:43.160 think in Atlanta that it ministers the benchmark now after 0:02:43.240 --> 0:02:45.760 it was taken away from the British Banking Association as 0:02:45.800 --> 0:02:49.840 it then was um IT wants to continue with the libel. 0:02:50.800 --> 0:02:53.679 The regulator clearly doesn't want that's the f c A. 0:02:53.919 --> 0:02:58.160 Andrew Bailey, when you just heard, clearly wants to phase 0:02:58.240 --> 0:03:02.120 it out. And by setting the dead line, my impression 0:03:02.200 --> 0:03:05.440 is that the thinking is that they will be forced 0:03:05.560 --> 0:03:09.400 to come up with some kind of solution that will 0:03:09.880 --> 0:03:12.920 satisfy his current needs because the needs have changed. The 0:03:12.960 --> 0:03:16.639 libel was answering a certain question that was asked a 0:03:17.120 --> 0:03:20.240 certain time. That question is no longer being asked, so 0:03:20.480 --> 0:03:26.560 library is answering it is five years enough time to 0:03:26.639 --> 0:03:35.000 transition away. There's the fifty trillion dollar questions. Um It's 0:03:35.440 --> 0:03:39.840 Bailey does say that in the he has spoken to 0:03:39.880 --> 0:03:42.960 the panel banks and he they reckoned that that should 0:03:42.960 --> 0:03:47.640 be enough. We will see. Well, let's talk about whether 0:03:48.480 --> 0:03:53.040 there is going to be uncertainty into swap rates based 0:03:53.080 --> 0:03:56.920 on the benchmark. Let's talk about financial lawyers and how 0:03:56.920 --> 0:04:00.240 busy they're going to be with libor based contracts, just 0:04:00.360 --> 0:04:03.320 checking contracts. Yeah, I think the lawyers are going to 0:04:03.440 --> 0:04:06.280 love it. They've been I've been talking to a few 0:04:06.280 --> 0:04:10.560 recently though. They've all built these, um, the big ones, 0:04:10.640 --> 0:04:14.840 big firms, what we call the Magic Circle in London. UM, 0:04:14.880 --> 0:04:19.800 they've all built artificial intelligence bots that will check contracts 0:04:20.040 --> 0:04:25.120 for do the grunt work. So it may not be 0:04:25.200 --> 0:04:28.320 as hard to do the papering as they called it. 0:04:28.600 --> 0:04:30.479 As it seems because if you have to go through 0:04:30.520 --> 0:04:34.800 it manually, millions and millions of contracts, then that's going 0:04:34.839 --> 0:04:38.200 to take forever. But if you've got a robot doing it, 0:04:39.000 --> 0:04:41.800 then it may not take quite as long as people think. 0:04:42.160 --> 0:04:45.880 But who knows. So you're getting a lot of associates 0:04:45.880 --> 0:04:50.640 out of work there. Um is what's the general feeling 0:04:50.839 --> 0:04:52.800 in about you know, we have about thirty seconds here. 0:04:53.240 --> 0:04:57.320 What's the general feeling about this? You know, ending of 0:04:57.480 --> 0:05:03.839 libor oh um. I think people people on the sharp 0:05:03.960 --> 0:05:07.000 end who are who are sort of swaps dealers, who 0:05:07.000 --> 0:05:11.440 are using it are waking up to the fact that 0:05:11.520 --> 0:05:13.080 they won't have it forever. It's not going to be 0:05:13.120 --> 0:05:18.800 around forever. Um. I was talking to a character from 0:05:18.839 --> 0:05:22.880 a private equity firm at them just after the meeting today, 0:05:23.120 --> 0:05:27.320 after the speech, and he was saying that they've got 0:05:27.320 --> 0:05:30.080 all these loans based on library and I said, well, 0:05:30.320 --> 0:05:31.760 you know, what did you think? What do you think 0:05:31.760 --> 0:05:34.000 of Sonya? He says, this is the first I've heard 0:05:34.000 --> 0:05:38.320 of it, so I think the process is really getting underway. Sonya, 0:05:38.400 --> 0:05:44.520 by the way, is the suggested M a substitute for library. 0:05:44.839 --> 0:05:48.360 It stands for Sir Stirling Overnight interest average, if I'm 0:05:48.360 --> 0:05:51.120 not mistaken, with be a benchmark or near risk, the 0:05:51.200 --> 0:05:56.040 benchmark for borrowing in pounds. Thank you, thank you so 0:05:56.120 --> 0:05:59.599 much for enlightening us. That's John Gloves, a Bloomberg News 0:05:59.600 --> 0:06:03.400 financial a regulation reporter, coming up lawsuits on climate change 0:06:03.480 --> 0:06:04.440 in California