* Libor to be based on transactions as much as possible
* "Risk-free" benchmark needed for derivatives by 2016
By Huw Jones
LONDON, July 22 Global regulators will implement
a twin-track approach to ensuring interest rate benchmarks are
less prone to manipulation, recommending safeguards to the
current system as well as developing alternatives.
Ten banks and brokerages including Barclays and UBS
have paid a total of around $6 billion to date to
settle U.S. and European regulatory allegations that they
manipulated the London Interbank Offered Rate, or Libor, a
benchmark against which around $450 trillion of financial
products from derivatives to home loans are priced worldwide.
The Financial Stability Board (FSB), which coordinates
financial regulation for the Group of 20 economies (G20), has
looked at how Libor could be made less prone to rigging, such as
by basing the benchmark "to the greatest extent possible" on
actual market transactions.
Libor is currently based on banks quoting rates at which
they think they could borrow from another bank.
The FSB, which has been working on the plans since last
year, has agreed with market practitioners - mainly banks and
brokerages - on a so-called "multiple-rate approach" to
reforming Libor over the coming two years.
This will involve strengthening Libor - and its continental
European counterpart Euribor and Japanese rate Tibor - by
underpinning them with market transactions data, the FSB said on
Administrators of the benchmarks have until the end of next
year to consult on any changes to the current system.
Alongside this, the regulator said work should also start on
developing alternatives, such as so-called "nearly risk-free
reference rates," which would be entirely based on verifiable
The FSB wants at least one risk-free rate by the second
quarter of 2016. "Developing such alternative reference rates
meets the principle of encouraging market choice," the FSB said.
Alternatives could be based on government bond rates, the
overnight indexed swap rate, or compounded overnight interest
rates. Shifting a material proportion of derivative transactions
to a risk-free rate would reduce the incentive to
manipulate rates, the FSB said.
EONIA, or euro overnight index average, an overnight
interest rate, was a viable, actively used, nearly risk free and
available, the FSB added.
Having a range of benchmarks would better fit the needs of
differing market participants and reduce possible systemic risk
from relying on just one type of rate, the FSB said.
Yet some participants remain concerned of possible market
disruption as a result of the reforms and one expert group -
made up of banks - said in a report to the FSB that in most
cases, fall-back provisions are not sufficiently robust for a
permanent discontinuation of any key "ibor" rate and the
transition to any new rates must be coordinated.
Meanwhile the FSB is also seeking to bridge a divide among
One U.S. agency, the Commodity Futures Trading Commission
(CFTC), wanted to scrap Libor and replace it with a
market-transactions based benchmark. Others, including Martin
Wheatley, chief executive of Britain's Financial Conduct
Authority and who co-headed the FSB's taskforce on benchmarks,
have been more cautious, saying such a sweeping change carried
Some financial products based on Libor, Euribor and others
in the same family stretch out many years, making a quick change
The FSB expects there will be differences in how countries
implement the twin-track approach to reform, for several reasons
- including the differing availability of underlying
transactions data and different markets for near-risk-free
rates. The FSB also said there were different levels of
willingness to use supervisory or other means to encourage
market participants to adapt to a multiple-rate approach.
Separately, the International Organisation of Securities
Commissions (IOSCO) published a review of how the administrators
of Libor, Euribor and Tibor - Intercontinental Exchange Inc
for instance in the case of Libor - had complied with
new standards for the benchmarks that it introduced last year.
IOSCO said none of the three could show that data used was
sufficiently accurate and reliable. The administrators must say
by the end of 2014 how they will address the failings ahead of
more checks next year.
(Editing by Jane Merriman and David Holmes)