U.S. Markets

U.S. Libor exposures larger than thought at $200 trillion: ARRC

(Reuters) - A committee of large banks tasked with helping U.S. derivatives markets move away from reliance on the London interbank offered rate (Libor) said on Monday that the benchmark rate underpins more derivatives and loans than previously thought, adding to the need to reduce its influence.

The Alternative Reference Rates Committee (ARRC) said that around $200 trillion in U.S. dollar-based derivatives and loans are based on Libor, with derivatives accounting for around 95 percent of the exposures.

That is 25 percent higher than previous estimates. “The vast scale and broad scope of this activity underscores the necessity of promoting robust alternatives to Libor,” the ARRC said in a report.

Regulators including Federal Reserve Chairman Jerome Powell are seeking to reduce markets’ reliance on Libor due to the decline in loans backing the rate.

If the rate stops being published “that has all the potential of being a pretty significant financial stability problem,” Powell said last Tuesday.

Reforms to banking and money market fund regulations, along with allegations of Libor manipulation before and during the 2007-2009 financial crisis, has resulted in fewer interbank short-term loans and reduced funds’ demand for bank debt, so Libor rates are sometimes estimated rather than based on actual transactions.

The ARRC in June voted to adopt an interest rate benchmark from the U.S. Treasuries-backed repurchase agreement market (repo) as an alternative to the use of Libor in exchange and privately traded derivatives.

The New York Federal Reserve said last week it will begin publishing the new reference rate on April 3, and the CME Group CME.O said it will launch futures based on the repo rate on May 7.

To help markets move away from Libor, the ARRC said it will also seek the creation of a forward-looking term rate that is based on derivatives backed by the repo benchmark.

The group will also expand its membership and working groups to include more market participants that will examine contracts for loans and other instruments based on Libor, with a view to identifying appropriate fallback rates in the event that Libor stops publication.

Editing by Cynthia Osterman