Australian regulators expect institutions to cease the use of LIBOR in new contracts before the end of 2021.
ASIC, APRA and the Reserve Bank of Australia have reiterated the importance of ensuring a timely transition away from the London Interbank Offered Rate (LIBOR).
Some USD LIBORs will continue until mid-2023, but even in the US regulators have stated that firms should cease entering into new contracts using USD LIBOR as a reference rate as soon as practicable and no later than 31 December 2021.
The Financial Stability Board supports the adoption of overnight risk-free rates where appropriate, and recognizes the role of forward looking risk-free rate term rates in some limited cases.
|Sponsored by Charter Hall Group|
The Golden Rules of Commercial Property Investment
It also supports International Swaps and Derivatives Association (ISDA) spread adjustments in cash products.
"Continued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system. Firms themselves may also face financial, conduct, litigation, and operational risks associated with inadequate preparation," ASIC, APRA and the RBA said in a joint statement.
ASIC commissioner Cathie Armour added: "Firms should, as soon as practicable, stop the sale and issuance of LIBOR-referenced contracts that expire after their relevant cessation dates and most importantly, stop offering new LIBOR products after the end of 2021."
RBA assistant governor (financial markets) Christopher Kent said: "Firms should not waste any time in moving away from LIBOR. The end date for LIBOR is clear and pending. Continued use of LIBOR after the end of 2021 poses significant risks to firms. There should be no new use of LIBOR - including USD LIBOR - after the end of 2021."
LIBOR is an interest-rate average calculated from estimates submitted by the largest banks in London.
It is open to corruption and cartel behaviour due to the nature of relying on estimates submitted by the big banks in one city. The need to transition away from LIBOR became apparent in 2012 when significant collusion between big banks in the UK was revealed.
The LIBOR scandal of 2012 resulted in a US Congress investigation and a parliamentary enquiry in the UK. Court documents filed in Singapore saw a Royal Bank of Scotland trader confirm that the LIBOR fixing process had essentially become a cartel. Messages were filed in court that showed traders blatantly discussing manipulating the LIBOR rate to the advantage of hedge funds.
The scandal also resulted in US homeowners filing a class action against their mortgage lenders, claiming that LIBOR manipulation made mortgage repayments more expensive. This case was based on analysis showing LIBOR rates rose on the first day of each month between 2000 and 2009. Most adjustable-rate mortgages reset payments based on the interest rate on the first day of the month.
ASIC has been conducting an ongoing investigation into Australian banks manipulation of interest rates, in 2015 it named ANZ as obstructing its investigation.