LONDON (Reuters) - The U.S. Federal Reserve and Bank of England on Thursday urged global financial markets to step up efforts to shift from the scandal-plagued Libor reference rate to alternative interest rate benchmarks.
New York Fed President William Dudley, speaking at a BoE event in London, said bankers and regulators have much work to do before 2021 when the London interbank offered rate, or Libor, could cease to exist.
And BoE Governor Mark Carney said he hoped the adoption of a Libor alternative in Britain would spur a new “ecosystem” of financial products.
After banks were fined for rigging Libor — an interest rate that underpins trillions of dollars of contracts and which the industry compiled itself at the time — central banks sought alternatives that were harder to manipulate.
Dudley said there was some early progress in adoption of the Secured Overnight Financing Rate (SOFR), which the New York Fed began publishing in early April, and which has daily volume in the underlying market of more than $700 billion.
While futures contracts are already issued on the SOFR, more such liquidity is needed for derivatives, as is the setting of a term reference rate, Dudley said.
“Time is of the essence, and we must manage it well,” he told a BoE forum in London.
Dudley added that “aggressive action” was needed to move to a more durable and resilient benchmark system.
In Britain, the BoE and major dealers have backed Sonia, the sterling overnight index average, as its preferred “near risk-free” interest rate benchmark in sterling derivatives and other financial contracts.
“Over time the private sector will develop a wider range of products referencing Sonia. Futures contracts have already been created,” Carney said in a speech delivered at Bloomberg’s offices in London.
“We can expect Floating Rate Notes and loans referencing Sonia to follow. The end-point should be an ecosystem for interest rate markets which has an altogether healthier foundation than at present.”
The BoE took over responsibility for Sonia in 2016 and wants it to replace Libor completely by the end of 2021. Sonia reflects bank and building societies’ overnight funding rates in the sterling unsecured market.
Carney also said more needed to be done to counter misconduct in the financial sector.
Additional reporting by Tom Finn; Writing by Andy Bruce in London and Jonathan Spicer in New York; Editing by Peter Graff