Global banks identify possible replacements for Libor

NEW YORK (Reuters) – A group of global banks and clearing houses, working with US regulators, said on Friday it has identified two possible replacements for Libor, the benchmark interest rate for $160 trillion worth of credit for everything from home mortgages to corporate loans.

The Alternative Reference Rates Committee (ARRC) said together with the Federal Reserve it has identified the Fed’s Overnight Bank Funding Rate ( OBFR) and the overnight rate on US Treasury securities pledged as collateral in repurchase, or repo, transactions as alternatives.

The London Interbank Offered Rate (Libor) has been in regulators’ cross hairs since its credibility was tarnished by a rate-rigging scandal emerging from the 2008 financial crisis. About a dozen global banks collectively have paid tens of billions of dollars in fines to settle the matter.

“The case for moving ahead to a new benchmark is very strong. The new benchmark is going be robust with a lot of transactions and will be resistant to manipulation,” Fed governor Jerome Powell told Reuters.

ARRC said the two rates it identified as replacements represent “robust” markets, each with $300 billion worth of daily trades. Bankers and regulators have raised alarms about diminishing daily liquidity in the markets for unsecured loans like Libor, calling into question their reliability as a gauge for US borrowing costs.

The stakes are large: Libor’s benchmark three-month rate stands as a reference rate for pricing $160 trillion of loans in the US and, together with companion rates in Europe and Asia, has some $350 trillion of global credit tied to it.

“Having a viable rate alternative is important to financial stability especially if Libor activity were to cease at some point,” Sandie O’Connor, the committee’s chair and chief regulatory affairs officer at JPMorgan Chase said on a call with reporters.

The group proposed a framework to phase in the new reference rates to minimize disruptions to financial markets. The plan would allow Libor-linked transactions to exist while the new benchmarks gain acceptance by dealers and investors.

“The ARRC envisions a paced transition focusing on new transactions rather than a ‘big bang’ that would seek to change existing trades,” it said in a reported released on Friday.

ARRC comprises 15 large global banks, which are also interest rate derivatives dealers along with the Fed, the US Treasury Department, the Commodity Futures Trading Commission and the New York Fed. Clearing houses such as Bank of New York Mellon, CME and LCH.Clearnet are also part of the group.

ARRC’s effort began in November 2014 and parallels those by authorities in Britain, Japan, Switzerland and the euro zone.

The committee said it picked OBFR and secured general collateral lending rates over four others: monetary policy rates like the fed funds rate; Treasury bill or bond rates; term overnight index swap ( OIS) rates and term- unsecured lending rates. These others suffer from smaller market sizes, as well as likely fluctuations in monetary policy framework and issuance.

OBFR, developed by the New York Fed, launched in March and reflects $ 300 billion of daily trades. The interest rate on secured general collateral repurchases, in which banks and dealers use Treasuries as collateral to borrow from investors, is of a comparable size.