Curb use of dollar Libor alternatives to Fed rate, says watchdog

By Huw Jones

LONDON (Reuters) – The use of four dollar-denominated alternatives to the now scrapped Libor interest rate need restrictions to avoid threatening financial stability, a global securities watchdog said on Monday.

IOSCO, a global securities watchdog group that includes the U.S. Securities and Exchange Commission as a member, said a review has identified “varying degrees of vulnerability” in these four unnamed rates.

The final dollar-denominated London Interbank Offered Rate or Libor was published last Friday.

Once dubbed the most important number in the world, Libor has been withdrawn after banks were fined for trying to rig a rate referenced in credit cards, business loans and mortgages worth trillions of dollars globally.

Libor has largely been replaced by rates compiled by central banks, such as the dollar-denominated Secured Overnight Funding Rate, or SOFR, from the Federal Reserve.

Several so-called credit sensitive rates (CSRs) and term SOFR rates are being offered as alternatives to SOFR, which has no forward ‘terms’ or credit component, though volume in them has been low.

Regulators have previously warned that these alternatives could be vulnerable during periods of market stress, but Monday’s statement goes further in suggesting curbs.

IOSCO said certain CSRs track bank commercial paper and certificates of deposit data which are not sufficiently deep, robust and reliable to underpin alternatives to Libor.

“Absent modification, their use may threaten market integrity and financial stability,” IOSCO said.

SOFR term rates also fell short of IOSCO standards given they rely on the continued existence of a deep and liquid derivatives market, IOSCO said.

“Administrators should consider licensing restrictions for use of CSRs and Term SOFR rates within certain products or by certain user groups,” IOSCO said.

Administrators should also consider improving the transparency of their rates, such as publishing input data, and not indicating in any way they are IOSCO-compliant, it added.

Market participants should “proceed with caution” if using CSRs, and contact their regulator before doing, IOSCO said.

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