Photographer: Simon Dawson/Bloomberg

Scandal-Ridden Libor’s Substitute on Tap for 2017, Treasury Says

  • Fed group created after rate-rigging probes cites 2 options
  • Finance chiefs ‘understand why this is in their self-interest’

A group set up by the Federal Reserve to identify an alternative to Libor may make its selection next year, a sign of momentum behind efforts to move away from the borrowing gauge that became mired in an interest-rate-rigging scandal.

Potential alternatives for the London interbank offered rate have been narrowed to two by the Alternative Reference Rates Committee, a group comprising regulators and financial firms convened by the Fed in 2014.

“We’d like the committee to select a rate at some point next year,” Daleep Singh, acting assistant secretary for financial markets at the U.S. Department of the Treasury, said in a Dec. 5 phone interview. “It is important to ensure enough time for a considered process with comprehensive feedback from end-users, because they have to take up this new rate and create markets in it with sufficient liquidity. The goal is an orderly, market-driven transition.”

Libor’s reliability came under fire after investigations found widespread manipulation of the benchmark, which represents the rate at which banks say they lend to each other and underpins more than $350 trillion of securities and mortgages. The scandals prompted a review of major reference rates, with regulators pushing to make the benchmarks more robust.

‘More Robust’

The ARRC’s two alternative candidates for Libor are the Overnight Bank Funding Rate, published by the New York Fed, and a form of the overnight Treasury general collateral repurchase agreement rate, according to the committee’s report published May 20. Both have a larger transaction base than Libor, making them “more robust and resistant to manipulation,” Singh said at an October conference in Chicago. About 30 percent of submissions for the dollar three-month Libor are directly based on transactions, he said, according to a statement of his remarks on the Treasury website.

The committee includes global interest-rate derivatives dealers, as well as the Fed and U.S. Treasury, which are ex-officio members, according to the New York Fed website. Bank of America Corp., Goldman Sachs Group Inc., and JPMorgan Chase & Co. are among financial firms on the panel. The ARRC also formed an advisory group last month to solicit feedback, including BlackRock Inc., Verizon Communications Inc. and Brevan Howard Asset Management LLP.

Executives at large financial institutions “understand why this is in their self-interest,” Singh said in the Nov. 5 interview. “They understand why it is to the benefit of the system as a whole."

— With assistance by Rick Green

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