Hunt for alternative to Libor struggles four years after rigging scandal 

  • M r Salmon wants the working group to spend another three months studying the option of using a secured rate, and looking at how a two to three year transition to that rate would work.
  • It is already part way through being reformed in a plan that makes the Bank of England the administrator of the rate and expands the number of transactions covered by the rate.
  • The Bank of England wants to restore faith in finance by replacing Libor, but has been unable to find a good alternative
  • The work is being carried out by a private sector working group, monitored by the Bank of England’s executive director for markets, Chris Salmon .
  • Another option is an as undefined “secured rate” based on the repo market or another market which includes collateral and so is based on secured lending.

The Bank of England has admitted it is struggling to find a viable alternative to Libor, more than four years after the crucial interest rate benchmark was discredited by the manipulation scandal.

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The Bank of England has admitted it is struggling to find a viable alternative to Libor, more than four years after the crucial interest rate benchmark was discredited by the manipulation scandal.

Officials had hoped to start encouraging a move to a new benchmark at the start of this year, but have yet to come up with a better version, or a clear way to get financial institutions to move to this new benchmark.

The work is being carried out by a private sector working group, monitored by the Bank of England’s executive director for markets, Chris Salmon.

“The original timeline for the Group’s work envisaged that adoption of a risk-free rate (RFR) as an alternative to Libor would begin at the start of 2016. For very good reasons – including the need to allow time for candidate RFRs to emerge – this has not proven possible,” said Mr Salmon in a letter to the group.

“However the passage of time has only sharpened the need for robust alternatives for Libor.”

One option is to adopt SONIA, the overnight sterling rate, as the replacement, which is compiled from unsecured loans.

It is already part way through being reformed in a plan that makes the Bank of England the administrator of the rate and expands the number of transactions covered by the rate.

Another option is an as yet undefined “secured rate” based on the repo market or another market which includes collateral and so is based on secured lending.

It is important for markets to have a risk-free interest rate on which other, riskier transactions can be based.

Libor, which was was used as that benchmark, is set by taking an average of the rate at which large banks lend to each other.

Trillions of pounds-worth of derivatives, loans and other transactions are based on Libor, which turned out to be unsound as some bank traders tried to artificially push the rate up or down to benefit their trading books.

Mr Salmon wants the working group to spend another three months studying the option of using a secured rate, and looking at how a two to three year transition to that rate would work. If it appears too hard, then SONIA would be a quicker option.

“I do not underestimate the difficulty of this task,” he said, warning that any chosen plan needs to confidence of markets to make sure the chosen rate does end up being used.

Hunt for alternative to Libor struggles four years after rigging scandal