Interest rate benchmarks should in future be based on actual market transactions and not banks’ judgments, Bank of England Governor Mark Carney said in minutes of a meeting at the BoE’s Roundtable on Sterling Risk-Free Reference Rates. In the aftermath of the LIBOR fixing scandal, the BoE and other central banks started considering alternatives based on actual market transactions to make them harder to manipulate.
Carney told industry representatives attending the roundtable that controls on LIBOR rate submissions from banks were now much tighter, but a situation where “a judgment-based benchmark underpinned an estimated $350 trillion-worth of contracts was not desirable.” Carney finished by noting that a shift towards robust, fully transaction-based reference rates was necessary and, over time, would happen. The BoE is developing its own “risk free” benchmark known as SONIA, but widespread adoption could only proceed with broad support from benchmark users, he added. Major dealers said in April they would back wider use of SONIA and the BoE is now sounding out if there is wider support.
Chris Salmon, the BoE’s executive director for markets, told the meeting that in many cases LIBOR was not the most appropriate reference rate: “Put simply, we want to see a transition to a less LIBOR-centric world.” The system-wide dependence on Libor “fixings” as currently compiled is an “unnecessary vulnerability”, he added, noting that derivatives markets in particular could be more effective if there were liquidity in alternative reference rates.
The BoE has already taken over responsibility for administering SONIA, or the sterling unsecured overnight interest rate benchmark, and is strengthening it. Its next step is to sketch out how SONIA could be used more widely. The European Central Bank said in May it was ready to work on its own index of bank-to-bank lending after an industry-led revamp of EURIBOR failed. The New York Federal Reserve and US Office of Financial Research are also developing three benchmark rates based on overnight repurchase agreements.
Read Chris Salmon’s speech on benchmark reform