Daily Management Review

The Fed and the Bank of England urge to speed up rejection of LIBOR


05/25/2018


The US Federal Reserve and the Bank of England called on global financial markets to step up efforts to move from the London Interbank Offering Rate (LIBOR) to alternative rates, Reuters reports.



Policy Exchange via flickr
Policy Exchange via flickr
The head of the Federal Reserve Bank of New York, William Dudley, speaking at an event of the Bank of England in London, said that bankers and regulators will have to do a lot of work before LIBOR ceases to exist.

The head of the Bank of England, Mark Carney expressed the hope that the transition to an alternative rate in the UK will contribute to a new "ecosystem" of financial products.

Britain will stop using LIBOR by the end of 2021, as regulators and banks want to replace this rate with a more reliable one.

LIBOR is calculated by the British Banking Association each a working day based on data provided by the largest British banks on their estimated borrowing costs. The LIBOR rate is calculated for five currencies: the US dollar, the pound sterling, the Swiss franc, the Japanese yen and the euro.

The reliability of the benchmark was questioned because of a series of scandals. It turned out that traders of a number of banks manipulated the rate by providing false data.

Dudley noted some progress in the adoption of the SOFR (Secured Overnight Financing Rate) rate, which the New York FRB started publishing in early April and which has a daily volume of more than $ 700 billion in the base market. While SOFR futures are already launched, more such liquidity required for derivatives.

The head of the Federal Reserve Bank of New York added that "aggressive actions" are necessary to move to a more solid and stable benchmark system.

In the UK, the Bank of England and major dealers supported the SONIA (Sterling Overnight Index Average) rate as the preferred "almost risk-free" benchmark.

"Over time, the private sector will develop a wider range of products related to SONIA." Futures contracts have already been created," Carney said. "The endpoint should be an ecosystem for interest rate markets that has a healthier basis than at present."

source: reuters.com






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