Intercontinental Exchange, the US exchanges operator, is looking to launch an alternative rate to replace Libor, the tarnished benchmark that global authorities are trying to phase out in the next two years.
ICE, which also administers the existing London interbank offered rate, is exploring launching a new rate aimed at cash markets such as loans, according to a white paper it published on Thursday. It has been supported by 13 out of the 16 banks that supply daily submissions for Libor.
The exchange’s move is an attempt to resolve a stand-off between markets and global regulators over a transition away from Libor, which authorities want to happen by the end of 2021.
Watchdogs are concerned that Libor is not based on real market transactions. But the benchmark has become so pervasive that it is still central to thousands of derivatives, bonds, credit cards and loan contracts, with a notional value of around $370tn. Around $200tn of deals are dollar-based loans and derivatives.
Regulators would prefer banks and investors to use alternative rates that reflect liquid and active markets, but take-up has been slow, in part because the alternatives are usually based on overnight rates.
Critics argue they do not sufficiently replicate Libor over a longer period and they are a particular problem for the loan market. Libor measures the cost of unsecured borrowing between banks for a specific period, usually over one, three and six months.
The exchange’s proposed replacement “has been developed to meet the potential short-term interest rate benchmark needs of lenders, borrowers and other users of [cash] products,” ICE’s white paper said.
Derivatives markets, which make up the bulk of deals, could transition from using Libor to alternative rates “without too much difficulty”, the paper added.
ICE’s benchmark, called the ICE Bank Yield index, would be based on transactions data reported to Finra, the US watchdog, as well as daily data directly submitted by 13 “large, internationally active” banks.
The benchmark would be based on unsecured lending, which, like Libor, would cover one, three and six months for lending in US dollars. It would be published every morning New York time.
In the paper, ICE also highlighted concerns that if the markets use overnight rates, in times of stress banks could be forced to lower their cost of lending, which would create an imbalance between risks and liabilities on their books.
ICE’s alternative would mimic Libor movements in volatile markets, and allow banks to match their liabilities, ICE said.
Last week Mark Carney, governor of the Bank of England, told UK parliamentarians that a transition from Libor “will happen”.
“We will work with the industry to make sure it happens . . . but it’s not going back,” he added.
Get alerts on UK financial regulation when a new story is published