martes, 22 de agosto de 2017

martes, agosto 22, 2017

How to Fix Libor Pains

The time has come to phase in an alternative to the interest-rate benchmark.

By Jerome Powell and J. Christopher Giancarlo
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Andrew Bailey, chief executive officer of the Financial Conduct Authority, in London, July 27. Photo: Bloomberg News


There’s a good chance your credit card, floating-rate mortgage, car loan and even the investment funding for the company where you work are all influenced by an arcane interest rate known to market professionals as Libor. Once called the London interbank offered rate, Libor is meant to reflect the interest rate that large banks must pay to borrow short term. The British Bankers’ Association has called it “the world’s most important number.”

Libor has enormous implications for the U.S. It is cited in financial contracts setting $150 trillion of dollar-denominated loans, securitizations and derivatives. But all has not been well with Libor.

Problems first came to light during the 2008 financial crisis, with accumulating reports of attempts by traders to manipulate the rates used to determine Libor. The U.S. Commodity Futures Trading Commission, working with U.K. regulators, investigated and ultimately fined nine institutions a total of $2.8 billion for their roles in the misconduct. Since then, U.S. authorities including the Federal Reserve have been deeply engaged with regulators in the U.K. seeking to strengthen Libor to the furthest extent possible.

Libor is calculated each day based on the quoted rates that a panel of 17 banks submit to ICE Benchmark Administration, an independent subsidiary of the Atlanta-based firm Intercontinental Exchange. The quotes represent the rates at which the banks are able to borrow in short-term money markets. Apart from overnight transactions, however, banks no longer borrow much in those markets.

In essence, banks are contributing a daily judgment about something they no longer do.

On July 27 the man charged with regulating Libor— Andrew Bailey, chief executive of the U.K.’s Financial Conduct Authority—called for an alternative to the current system. He noted that the FCA’s legal authority to compel banks to submit quotes to Libor could not be relied on indefinitely.

The FCA has brokered agreements with banks to continue submitting rates until the end of 2021, at which point a new benchmark is expected to take its place.

We support this approach. It offers a longer period of guaranteed stability than the current two-year period for compelling submissions to critical benchmarks described in European Union regulations. We have also encouraged U.S. banks that submit to Libor to cooperate with the FCA. Of course, Libor could remain viable in some form past 2021, but market participants can’t safely assume that it will. The time has come to move away from it.

Fortunately, we are not starting from scratch. The Fed has convened a group of private-sector participants who regularly broker and clear Libor transactions to form the Alternative Reference Rates Committee. Following an extensive consultation, the ARRC recommended replacing Libor with a rate derived from short-term loans known as repurchase agreements, backed by Treasury securities as collateral. This so-called repo rate is a measure of nearly risk-free borrowing. Using the Treasury repo rate resolves the central problem with Libor, because it will be based on actual market transactions currently reflecting roughly $800 billion in daily activity. That will make it far more robust than Libor.

The ARRC has also developed plans for a gradual transition to the new rate. Those plans are a valuable starting point for the work that now needs to be done.

Given Mr. Bailey’s announcement, the time has come for market participants and regulators to work together on a plan for dealing with existing Libor-based contracts maturing after 2021. This plan must also address how to expand adoption of the broad Treasury repo rate into a wider array of products that rely on a benchmark. It is a big task, but a stable financial system requires a stable reference interest rate. There is time for this transition to be done thoughtfully. Our agencies are prepared to help ensure that it is done cooperatively and smoothly.


Mr. Powell is a member of the Board of Governors of the Federal Reserve System. Mr. Giancarlo is chairman of the U.S. Commodity Futures Trading Commission.

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