By Tom Braithwaite
US regulators have called for new interest rate benchmarks to be found quickly to replace Libor, the interbank borrowing rate at the centre of a sprawling rate-rigging investigation.
The Financial Stability Oversight Council, a collection of regulators including the Federal Reserve and Treasury, said on Thursday that alternative rates “anchored in observable transactions” should be identified “promptly” by international officials and market participants.
The council’s call, contained in the annual report into areas of concern in the financial system, sees other US regulators throwing their weight behind Gary Gensler, chairman of the Commodity Futures Trading Commission, who has argued that Libor cannot be repaired and must be replaced as soon as possible.
Officials should “develop a plan to accomplish a transition to new benchmarks while such alternative benchmarks are being identified”, the FSOC found. The collection of regulators was set up in 2010 in an attempt to avoid regulatory gaps and turf wars.
Although other officials are moving in the same direction, there has not been the same need for speed felt across the globe. A global task force of securities regulators chaired by Mr Gensler and Martin Wheatley, head of the UK Financial Conduct Authority, called last week for benchmarks to be linked to transactions wherever possible.
Mr Wheatley has repeatedly warned of the difficulties of replacing Libor, because many Libor-linked contracts last for decades. “What you can’t do is throw something away before you have an alternative,” he said recently. More than $350tn of financial contracts reference Libor, adding to the potential difficulties of a change in the benchmark.
“The international regulatory community is taking actions to address the governance and the integrity of Libor and to consider transitions towards alternative benchmarks,” Ben Bernanke, Fed chairman, told the meeting of the FSOC.
Mr Gensler has led the global rate-rigging probe that has extracted more than $2.6bn in fines from three banks – Barclays, UBS and Royal Bank of Scotland – and investigated nearly a dozen other groups.
The Bank for International Settlements last month urged central banks to “promote the development and improvement” of Libor alternatives. It specifically mentioned benchmarks from the overnight index swap market, in which banks exchange their fixed-rate swaps, and the repo market, which tracks rates for interbank lending that is secured with collateral.
The FSOC also tackled other perceived weaknesses. “Wholesale funding markets remain vulnerable to runs that could in turn trigger destabilising fire sales,” said Mr Bernanke. “To address such concerns the council recommends that the SEC consider regulatory action to improve the loss-absorption capacity of money market funds and mitigate run risk associated with those funds.”