LIBOR Overhaul In the Works: Financial Times

Following the suspension of the HECM Standard fixed rate product, the industry is expecting to see more adjustable rate reverse mortgages, but the way interest rates are calculated is on the fast-track for an overhaul. A new system replacing the scandal-ridden LIBOR is in the works and could be implemented as soon as next year, reports Financial Times.

The system would use objective survey-based lending rates along with transaction-linked indices in an effort to reform the London Interbank Offered Rate (LIBOR).

Three banks have already paid more than $2.5 billion in penalties in the wake of the LIBOR manipulation scandal, with several more facing fines, FT reports. 

Those holding $350 trillion in existing contracts referencing LIBOR would be afforded continuity through the dual-track system, Martin Wheatley, a U.K. regulator heading up the LIBOR reform movement, told the Financial Times. 

U.S. regulators have called for a “prompt” switch to transaction-based rates, however, rather than a parallel system. The existing system is “unsustainable” in the long term, Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, which is leading the LIBOR probe, told FT, as the volume of unsecured lending is insufficient for banks to make accurate estimates. 

Market participants—not regulators—should make the final call on whether to replace LIBOR and when that should happen, according to Wheatley, the CEO of the Financial Conduct Authority. 

“You can’t just say: ‘Forget about yesterday’s problems, we’ll just move to the future,’” Wheatley says in the article. “If you change the definition, it’s almost certain that one side of every one of those trades would lose out and then would say: ‘We’re no longer bound by this.’”

As a U.K. committee searches for a new LIBOR administrator, Wheatley says the ideal organization would be able to run both the old model and the new one together, as it may not be possible to design a continuous rate.

“From a pragmatic point of view, a two-rate system makes quite a lot of sense,” Kevin Milne, chief executive of benchmark provider Rate Validation Services, told FT, “because it avoids the dislocating effect of a big bang approach.” 

Read the full story at Financial Times.

Written by Alyssa Gerace

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