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 money.
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 tighter.
But, according to the minutes, Carney said a situation where “a judgment-based benchmark underpinned an estimated US$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 Monday.
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.
The New York Federal Reserve and US Office of Financial Research are also developing three benchmark rates based on overnight repurchase agreements. - Reuters
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