U.S. Markets

Fed's Dudley urges quick shift from scandal-hit Libor rate

FILE PHOTO: William C. Dudley, President of the Federal Reserve Bank of New York, attends a conference about trade and globalization at the central bank of Brazil headquarters in Sao Paulo, Brazil, March 1, 2018. REUTERS/Nacho Doce/File Photo

(Reuters) - World financial markets must continue to quickly and safely shift from the scandal-plagued Libor reference rate to alternatives including a U.S. option that was born just last month, a Federal Reserve official leading the transition said on Thursday.

New York Fed President William Dudley said bankers and regulators have much work to do before 2021 when the London interbank offered rate, or Libor, could cease to exist. He said there was some early progress in adoption of the Secured Overnight Financing Rate (SOFR), which the New York Fed began publishing in early April, and which has daily volume in the underlying market of more than $700 billion.

While futures contracts are already issued on the SOFR, more such derivatives liquidity is needed, as is the setting of a term reference rate, Dudley said. “Time is of the essence, and we must manage it well,” he told a Bank of England forum in London.

“Because of the great uncertainty over LIBOR’s future and the risks to financial stability that would likely accompany a disorderly transition to alternative reference rates, we need aggressive action to move to a more durable and resilient benchmark regime,” added Dudley, who is to step down from the Fed next month.

Regulators hope that SOFR, which is based on transactions in the Treasury repurchase market where banks and investors borrow or loan Treasuries overnight, will eventually be adopted to back U.S. dollar-based derivatives and loans. A series of other alternative reference rates have also been established or conceived. [nL1N1RB0KF]

The regulators want to reduce market dependence on Libor, which was manipulated by big banks before and during the 2007-2009 financial crisis. Dudley said he expects Libor to “go away” by 2021.

Reporting by Jonathan Spicer; editing by Diane Craft