A broader definition of the benchmark Libor interest rate and a better alternative is needed, an influential U.S. Federal Reserve official said on Thursday, joining the chorus of world regulators calling for changes in the wake of abuse.
New York Fed President William Dudley highlighted two key areas of concern: the need for a definition of the rate that better reflects observable funding patterns; and the need for an alternative reference rate that works for all participants and is based on a deeper cash market.
“This combination, a more robust and resilient LIBOR for transactions that require a reference rate with a bank credit risk component and the development of an alternative reference rate for transactions like interest rate derivatives that don’t, will strengthen our financial system and help undo some of the damage caused by earlier transgressions,” Dudley said in prepared remarks that did not mention monetary policy.
A critical tool in global markets, Libor, or the London interbank offered rate, is used in a large number of dollar-based contracts. It is also a reference rate for another $150 trillion in contracts denominated in other currencies and is common in financial derivatives.
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