UPDATE 1-Bank of England wants less Libor-centric financial world
(Adds comments, background)
By Huw JonesLONDON, July 17 (Reuters) - Interest rates used to price
financial contracts worth trillions of dollars globally should
in future be based on actual market transactions and not banks'
judgements, Bank of England Governor Mark Carney said in minutes
of a meeting released on Monday.
The pricing of financial contracts based on the London
Interbank Offered Rate (Libor) led the BoE and other central
banks to look at alternatives based on actual market
transactions to make them harder to manipulate.
Libor is based on submissions from banks of interest rates
they believe they would be charged by other banks for borrowing
Banks were fined billions of dollars for trying to rig Libor
and its continental European counterpart, Euribor.
Libor had been compiled by a UK banking industry body, which
was stripped of this role. The benchmark is now run by an
independent firm regulated by the Financial Conduct Authority,
but Carney's comments signal that such reforms won't be enough.
He told industry representatives attending the BoE's
Roundtable on Sterling Risk-Free Reference Rates on July 6 that
controls on Libor rate submissions from banks were now much
But, according to the minutes, Carney said a situation where
"a judgement-based benchmark underpinned an estimated $350
trillion-worth of contracts was not desirable."
"The Governor finished by noting that a shift towards
robust, fully transaction-based reference rates was necessary
and, over time, would happen," the minutes said.
The BoE is developing its own "risk free" benchmark known as
SONIA, but widespread adoption could only proceed with broad
support from benchmark users, Carney said.
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," Salmon said in comments released on
The system-wide dependence on Libor "fixings" as currently
compiled is an "unnecessary vulnerability", he added.
"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
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. [nL8N1I67TM]
The New York Federal Reserve and U.S. Office of Financial
Research are also developing three benchmark rates based on
overnight repurchase agreements. [nL1N1D513B]
(Reporting by Huw Jones; Editing by Rachel Armstrong and Mark
((firstname.lastname@example.org; +44 207 542 3326; Reuters
Keywords: BOE CARNEY/LIBOR (UPDATE 1)