Pimco warns FCA on ditching Libor without review

Pimco has warned the FCA a review of the scope of products and investors affected by Libor is needed as the regulator calls for the end of the benchmark.

In July, FCA chief executive Andrew Bailey said Libor could be phased out by the end of 2021 and that authorities were working on several alternatives to replace it.

In a blogpost on the company’s website, Pimco global head of portfolio risk management William De Leon and team colleague Courtney Walker say forcing a Libor transition date before the market is prepared will likely cause a mass scramble to migrate positions.

Libor determines interest payments for over $350trn in derivatives, futures, corporate bonds, mortgages and other financial products, according to Libor administrator ICE Benchmark Administration.

“If existing trades continue to reference the old Libor, there is a risk that a bifurcated market will develop which may severely affect end-users and result in punitive impacts to valuations,” De Leon and Walker write.

While Pimco supports plans for the benchmark to reference actual transactions instead of voluntary submission from banks based on “expert judgment”, the potential risks to investors are too great “to force a transition without a thorough review of the scope of products and investors affected by Libor”, the pair says.