Has Andrew bailey been lying all along?

Our intention is that, at the end of this period, it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR.  It would therefore no longer be necessary for us to sustain the benchmark through our influence or legal powers.

Andrew Bailey, July 2017, The future of LIBOR
The FCA welcomes the Government’s announcement today that it intends to bring forward legislation to amend the Benchmarks Regulation (BMR) to give the FCA enhanced powers.



Those two statements from the same institution, just a couple of years apart, should be testimony that it has never really understood the game it was playing with LIBOR (and fire). LIBOR is not, will not and has never been perfect. But because of history, in which regulators, in particular the Bank of England, has played a significant role, transitioning from LIBOR is more difficult than creating a world without LIBOR if LIBOR had never existed. It is difficult to have a coherent plan when your regulator and the governor of the Bank of England are schizophrenic about what should be done.

A premonitive blog of mine, from February 2017, was titled Change of benchmark index is a difficult task. To be fair, I exaggerate a little bit my premonition superpower, the real title was Change of benchmark overnight index is a difficult task. I will be able to use that premonitive title again soon in relation to EFFR/SOFR transition, but this is another blog (and another seminar). The point is that changing benchmark is more difficult than creating a benchmark where none existed.

All the solutions presented by regulators and ISDA are about legal issues, not about why we have the LIBOR king in the first place. That reason is risk management. Having a fallback in place or a super-powerful FCA is not helping risk management, it is only helping legalese discussion on the transition. My understanding of what FCA is trying to do is to forbid the use of LIBOR for interbank derivatives but forcing the use of LIBOR when it cannot be changed. The forbidding of interbank use is through unreviewable unrepresentativeness declaration and blackmail about "serious questions". This dichotomy between tough and not-so-tough legacy trades has a name in quant speak: unhedgeable basis. Unhedgeable means no replication, no risk free valuation, including market price of risk in pricing, and higher cost for end users.

From my quant perspective, those recent decisions by regulator, maybe with the help of unsuspecting parliamentarians, is simply an additional cost for interest rate risk management, i.e. increased financing cost for corporates and increased mortgage cost for house owners. The only winners: benchmark interest rate quants, e.g. me! So much more potential work, so much more crazy pricing adjustments, like Value Adjustment for Transition (VAT). I certainly have to recognize my conflict of interest in that matter!

As usual, don't hesitate to contact me if I can help (for a reasonable fee) in navigating this schizophrenia.

Note: I have a mathematical doctorate, not a medical doctorate. My use of the term schizophrenia should not be understood in the psychiatric sense but in the general use sense of "approach characterized by inconsistent or contradictory elements".

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