(Adds more detail, background)
By Huw Jones
LONDON, July 22 Global regulators have proposed
a twin-track approach to ensuring that interest rate benchmarks
are less prone to manipulation by recommending safeguards to the
current system and also by developing alternatives.
Ten banks and brokerages have paid 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 as much as possible on actual market
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 by underpinning them with market
transactions data, the FSB said.
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 a Libor alternative, such as so-called "nearly risk
free reference rates," which would be entirely based on
verifiable market transactions.
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.
There had been disagreement among regulators over how to
reform Libor. One U.S. agency, the Commodity Futures Trading
Commission (CFTC), wanted to scrap it and replace it with a new,
market-transactions based benchmark.
But other regulators, including Martin Wheatley, chief
executive of Britain's Financial Conduct Authority and who
co-headed the FSB's task-force on benchmarks, has been more
cautious, saying such a sweeping change carried risks.
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
will implement the twin-track approach to reform. It said there
were several reasons for this, including 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
(Reporting by Huw Jones, editing by Matt Scuffham and Jane