The United States Treasury Department would like to break the market of its Libor addiction.
The London Interbank Offered Rate, a measure of the interest banks claim to charge one another to loan money, is tied to an estimated $350 trillion of notional value derivative contracts and $10 trillion in loans. It's also been under attack since before the financial crisis as banks admitted to rigging it to benefit financially. Now Daleep Singh, acting assistant secretary for financial markets for the U.S. Treasury, wants users to move to a new benchmark for global interest rates.
“If you are a user of Libor, and I'm sure nearly all of you are, I ask you to think about whether it's really the best choice for your purposes,” Singh told a roomful of executives at the Futures Industry Association conference in Chicago Thursday. “If you are borrowing money in an adjustable-rate loan, does it make sense to you that your interest rate will go up if the market starts to view a handful of banks as less creditworthy on average?”
The Treasury Department supports two alternatives that received the backing of the Alternative Reference Rates Committee in May, according to Singh. The first is the overnight bank funding rate, which is published by the New York Fed. The second is the overnight Treasury GC repo-based rate.
The OBFR has been in use since March, with 10 years of simulated back history available, Singh said. While the Treasury GC repo-rate is still being developed, the large number of transactions in the secured funding market make it a “significant potential benefit,” he said.
“We believe a transition to an alternative reference rate, which may involve short-term costs, is clearly in the collective interest of financial institutions, market participants, consumers, and policymakers,” Singh said.
The daily Libor rate was set by a panel of 16 banks based on submissions that were supposed to reflect borrowing rates in the interbank market. It was calculated by averaging the middle eight submissions. The U.S. has alleged that traders manipulated their bank's submissions to increase the profitability of their trading positions.
The U.S. Libor probe has now led to charges against more than a dozen bankers and brokers. Of those, two former Rabobank Groep traders were convicted at trial while others — including three from Rabobank and one from Deutsche Bank — pleaded guilty.
The oversight of Libor, previously managed by the British Bankers Association, was taken over by Intercontinental Exchange Inc. after international regulators sought to improve how the measure is calculated. Part of the change by Intercontinental's ICE Benchmark Administration unit has been to include more real transactions in how Libor is set.
“The reforms to strengthen Libor by IBA are important and need to continue, but in parallel we need to develop an alternative,” Singh said in an interview after his speech. That will allow the market “in an orderly way” to shift to a Libor alternative, he said, with “market forces facilitating that transition.”
Bloomberg News
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