ETF News

ICAP to launch U.S. rate alternative to Libor

NEW YORK, May 1 (Reuters) - A top bond broking firm plans to launch as soon as Friday an alternative U.S. rate benchmark to the London interbank offered rate, whose reliability has been questioned during the current global credit crisis.

ICAP plc IAP.L said on Thursday its survey of borrowing rates between U.S. banks, called the New York Funding Rate (NYFR), is intended to address the shortcomings of Libor cited by traders and analysts.

NYFR will reflect banks’ estimate on the market rate to obtain unsecured funding from each other, rather than the rates at which banks say they are borrowing at, which Libor measures.

“By changing the parameters, we will get a different perspective,” said Lou Crandall, chief economist at Wrightson ICAP. “Whether it (NYFR) is accurate, the players will know.”

ICAP already publishes Eurodollar rates, which are reflected in dollar Libor, on news and data terminals from Bloomberg, Thomson Reuters TRI.TOTRIL.L and other information vendors. Those rates are cited by the Federal Reserve in its daily survey of U.S. interest rates.

Crandall said, however, the NYFR is not intended to displace Libor as a rate benchmark. Trillions of dollars of loans and financial instruments around the worldwide are pegged against Libor.

Doubts about Libor picked up steam earlier this month after The Wall Street Journal reported banks contributing dollar quotes to daily fixings had been under-quoting the true cost of funds to avoid being labeled as desperate for cash.

The BBA has taken steps to assure the market about Libor’s accuracy, including the expulsion of any bank from its rate survey if it is found acting improperly.

“The BBA will ensure that dollar BBA Libor continues to be a transparent, objective, accurate rate,” said John Ewan, director of BBA LIBOR with the London-based banking group.

“Commercial providers trying to emulate the BBA LIBOR fixing process for any region would need similar support and commitment from the markets and would have to meet BBA LIBOR’s standards for transparency if it seeks to win the market’s confidence,” Ewan said in a statement.

NYFR differs with the Libor system by offering anonymity to the banks surveyed.

“We are asking for a generic market rate ... The anonymity makes it useful from an information perspective,” Crandall said.

That transparency, under which all the rate postings by banks are made public, has become a liability for Libor, according to Crandall. “In times like these, this could be a drawback,” he said.

Other NYFR features which differ from Libor:

-- The survey will be conducted at 9:30 a.m. New York time and the NYFR rates will be generated at about 10 a.m. This compares with 11 a.m. London time, or 6 a.m. in New York, when the BBA sets Libor in all currencies.

-- ICAP will collect rates on 1- and 3-month overseas dollar deposits. BBA’s dollar Libor rates go out to 12 months.

-- NYFR will encompass unsecured bank funding sources such as certificates of deposits, money market mutual funds and government-sponsored enterprises. Libor is explicitly defined as an interbank deposit rate. (Additional reporting by Jamie McGeever in London; editing by Gary Crosse)