G20 watchdog orders Libor alternatives by 2016 in benchmark reform

Global regulators will implement a twin-track approach to ensuring interest rate benchmarks are less prone to manipulation, recommending safeguards to the current system as well as developing alternatives. Ten banks and brokerages including Barclays and UBS have paid a total of around $6 billion to date to settle US 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 world-wide.
The Financial Stability Board (FSB), which co-ordinates 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 "to the greatest extent possible" on actual market transactions. 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 and Japanese rate Tibor - by underpinning them with market transactions data, the FSB said on Tuesday. 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 alternatives, 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. Alternatives could be based on government bond rates, the overnight indexed swap rate, or compounded overnight interest rates. Shifting a material proportion of derivative transactions to a risk-free rate would reduce the incentive to manipulate rates, the FSB said.