Banks Pick New Reference Rate to Replace U.S. Dollar Libor -- Update
June 22 2017 - 7:31PM
Dow Jones News
By Katy Burne
Efforts to replace Libor with a credible alternative have taken
another step forward.
Fifteen banks voted Thursday on a replacement for the U.S.
dollar London interbank offered rate, the besmirched interest-rate
benchmark that some of them were accused of rigging in an
industrywide scandal a few years ago.
Banks participating in the vote had settled on two likely
candidates as of last year and decided on a rate derived from a
broad set of borrowing transactions secured by U.S. Treasurys,
according to a statement from the Alternative Reference Rates
Committee. The individual vote tally wasn't disclosed, a spokesman
for the committee said.
Phasing in the new rate is expected to start next year on a
voluntary basis, after the committee publishes a report on its
work.
Getting U.S. financial firms to migrate to the new benchmark
won't be like flipping a switch. Libor has been deeply embedded in
financial markets for decades and is used to set rates for hundreds
of trillions of dollars of derivatives and other borrowings,
including loans to consumers, companies and governments.
In May, the U.K. announced an alternative reference rate to
Libor for Sterling-based derivatives and other financial-market
contracts.
In the U.S., the committee has "got to have a plan to encourage
the market to adopt it," said David Duffee, partner at law firm
Mayer Brown.
The banks that voted Thursday were brought together in 2014 by
the Federal Reserve Bank of New York and the Fed Board of Governors
in Washington, D.C., after certain banks were alleged to have
manipulated Libor. Banks collectively paid billions of dollars to
settle those investigations.
At the time the committee was formed, neither of the U.S.
alternative rates had been created. Even now, the preferred rate
selected has to go through a round of public comment and won't be
published until later this year or 2018.
The rate the banks decided on is based on short-term loans known
as repurchase agreements or "repo" trades, backed by Treasury
securities as collateral. The New York Fed has proposed publishing
the rate in cooperation with the Office of Financial Research.
The chosen rate consists of transaction data from across the
repo markets, including some provided by Bank of New York Mellon
Corp. and others settled by a unit of the Wall Street-controlled
utility Depository Trust & Clearing Corp. But it excludes
trades struck one-for-one between firms that aren't processed by
third parties, as well as repo trades conducted with the Fed.
The runner up in the vote, the so-called Overnight Bank Funding
Rate, is an overnight gauge of unsecured bank funding costs
composed of transactions from the federal-funds market and
Eurodollar trading. That rate has at times been beset by slumping
trading volumes.
Asset managers, including BlackRock and Pacific Investment
Management Co., were consulted as part of an advisory group formed
in November 2016 but didn't vote on Thursday. A significant
majority of them had expressed a preference for the Treasury repo
rate, ARRC said. Four financial market utilities also provided
feedback.
Last May, a Treasury group convened by the New York Fed
recommended that industry participants use benchmarks that comply
with new international financial-market standards. Those standards
have been promoted by the International Organization of Securities
Commissions.
Sandra O'Connor, a J.P. Morgan Chase & Co. executive who
chairs the ARCC, said in a statement following the vote that by
selecting an alternative to Libor, the industry "took an important
step to strengthen the financial system."
Fed governor Jerome Powell said in a separate statement he was
confident the new rate is "based on a deep and actively traded
market and will be highly robust."
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
June 22, 2017 19:16 ET (23:16 GMT)
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