* Regulatory and market pressure mounts on Libor, Euribor
* Industry group visits ECB to propose new benchmark
* Euribor organisers also examine new repo standard
By Marc Jones and John O'Donnell
LONDON/BRUSSELS, Nov 7 A group representing some
of the world's most powerful banks has approached the European
Central Bank to seek backing for a new way to calculate the cost
of funding after the Libor rigging scandal, people familiar with
the matter said.
The approach comes as a collapse in interbank lending and
the threat of a regulatory clampdown have put in doubt the
future of such benchmarks, driving a search for different ways
to anchor the price of funding.
Members of the European Repo Council, a group attached to
the International Capital Markets Association (ICMA), whose
members include Deutsche Bank and Goldman Sachs, have discussed
an alternative to Euribor (Euro Interbank Offered Rate) or its
London equivalent with ECB officials.
People who attended the meeting in Frankfurt last month said
the group sounded out the central bank about setting up a
benchmark based on actual "secured market" trades. Those
transactions involve banks providing bonds, shares or other
types of assets as security for loans.
"We have Euribor and Libor and we know the problems with
them," said one of the people. "The unsecured (interbank) market
is also disappearing. So we need an alternative. A secured index
makes a lot of sense."
Market insiders believe such a move could ultimately lead to
phasing out indexes set in this way and which are used to set
the price of trillions of euros of products from home loans to
The group also asked the ECB to oversee the calculation of
the rate, to lend the new index credibility. But the bank's
officials turned down such a role, saying their preference was
for such benchmarks to be wholly market-run.
A spokesman for the ICMA declined to comment. And a person
familiar with the ECB's thinking said the central bank did not
want an active role.
The discussions are intended to plot a way forward after
manipulation of the London Interbank Offered Rate (Libor) led to
fines of $450 million for Barclays, hardening resolve
for a regulatory overhaul of the methods used to set the price
The problems may yet widen. Anti-trust authorities are still
investigating possible manipulation of Libor and its smaller
euro counterpart, Euribor.
And the European Commission is considering rules to change
the way such benchmarks are calculated, as well as imposing
tougher legal penalties on those who manipulate them.
The new models to calculate funding, which could take many
years to realise, would address another problem in a crisis that
shows little sign of abating after half a decade: how to
calculate an accurate price for funding when banks are unwilling
or unable to lend to their peers.
The group that runs Euribor - an arm of the European Banking
Federation (EBF) - is examining a similar idea to that suggested
by the banking group.
"We plan to work short term on enhancing Euribor governance,
process and supervision, and long term to continue working with
all the ... stakeholders to see what could be done to adapt the
fixing if the market was to change in the coming years," said
Cedric Quemener, director at Euribor-EBF, which compiles the
"We ... are already working on a repo real-transaction-based
benchmark," he said. "We have reached a consensus across
European banks in supporting the repo effective project (named
By reflecting the price of secured paper, such a model would
give a more realistic picture of the price of funding and avoid
relying solely on interbank lending.
The move comes as Euribor, the current benchmark used when
fixing interbank euro loans, faces pressure to change.
Citigroup, one of the world's biggest banks and a
major player in European money markets, left the Euribor
rate-setting panel in September, citing "low interbank
transaction volumes in the euro zone". More than 40 banks remain
on the panel.
Citigroup had said last year that it received information
requests from investigators looking into interbank offered
Although such "secured" benchmarks are unlikely to be
established in the immediate future, the preparation could be
the first step towards a gradual phasing out of traditional
interbank ratings as a reference for determining the cost of
It would also address the concerns of the European Central
Bank, which has pushed for an overhaul of Euribor as well as a
possible shift to actual market transactions, sources told
Reuters earlier this year.
The European Commission may also ask to shift the basis of
the calculation to actual lending rates instead of the current
system, which like Libor uses banks' assessments of what they
expect to be charged.
Britain's top financial watchdog, the Financial Services
Authority, has also recommended that Libor be underpinned by
actual market transactions where possible, with its governance
stripped from an industry body.
The U.S. Commodity Futures Trading Commission (CFTC) wants
benchmarks based on real transactions as soon as possible.
In September, the EU's executive Commission opened talks
with the industry about possible curbs on such benchmarks that
could lay down stricter rules on how the rate for Euribor is
established, as well as enforcing new public supervision.
"This is going to be taken out of the hands of industry,"
said one banker. "There is no way, given the importance of these
indices, that they will be allowed to remain a best guess
produced by industry for industry."
Adding to this pressure, Joaquin Almunia, the European
Union's anti-trust chief, is investigating Euribor, Libor and
other benchmarks for possible breaches of the cartel rules.
He said recently that banks and brokers may have colluded to
rig benchmark interest rates, but did not specify which indexes
were open to question. If he were to find wrongdoing, those
involved could face fines of up to 10 percent of global revenue.
Reuters parent company Thomson Reuters Corp
collects information from banks and uses it to calculate Libor
rates. It also computes Euribor.