The US government is to replace the scandal-hit Libor inter-bank interest rate with a new benchmark based on the cost of borrowing against US government debt.
Libor (the London Interbank Offered Rate) is used for short-term lending between banks, and also as a reference rate for securities worth trillions of dollars around the world.
It has been hit by a series of scandals over the past few years, with banks and traders accused of manipulating rates.
In 2012, UBS agreed to pay $1.5bn to US, UK and Swiss regulators for its role in the scandal, while in the same year Barclays was fined £59.5m by the UK regulator.
In 2016 Barclays reached a $100m settlement with more than 40 US states for rigging Libor, while in the UK, four Barclays traders, Peter Johnson, Jonathan Mathew, Jay Merchant and Alex Pabon, were jailed for conspiracy to defraud.
Now the Alternative Reference Rates Committee (ARRC), set up by the US government to find an alternative to Libor, has unveiled its new benchmark, in agreement with the Federal Reserve.
At its meeting on Thursday (June 22) the ARRC said the new reference would be based on a broad Treasuries ‘repo’ (repurchase) financing rate “that, in its consensus view, represents best practice for use in certain new US dollar derivatives and other financial contracts”.
“The ARRC today took an important step to strengthen the financial system by selecting a robust alternative reference interest rate,” said ARRC chair Sandra O’Connor.
“I am proud of the committee’s work, and look forward to our continued efforts to promote the widespread adoption and use of this rate.”