BoE Carney Urges Industry to Move Away from Libor

Interest rates used to price financial contracts worth trillions of dollars globally 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 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 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 $350 trillion-worth of contracts was not desirable.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza