Since the LIBOR scandal erupted, US officials have been working toward an alternative benchmark. In 2014, the Fed set up a working committee that includes more than a dozen large banks and regulators Before the weekend the committee (Alternative Reference Rates Committee) proposed two possible replacements for LIBOR.  

There reportedly was some consideration of using the Fed funds as an alternative. However, Fed funds were rejected because it would have been made it more difficult to change the monetary policy framework in the future.  

A few months ago, the NY Fed began publishing an “overnight bank funding rate” (OBFR). It is based on transactions in both the Fed funds and Eurodollar market. The daily turnover is around $300 bln.  This is one alternative to LIBOR.  

The other possible alternative that the committee proposed was the General Collateral Repo Rate (GCRR). The repo is for repurchase agreement. One exchanges cash for a Treasury security one day and does the opposite the next day. The repo market is fragmented, but the most active are the tri-party repo where the average daily turnover is about $300 bln.

GCRR requires additional work as presently there is no single rate associated with it. However, the minutes of the December 2015 FOMC meeting suggests the Fed is considering producing a rate. 

Estimates suggest that something on the magnitude of $160 trillion of derivative contracts and trillions more corporate loans and mortgages are tied to LIBOR. It is a logistic challenge to transition to a new benchmark that would be more difficult to manipulate.  The next step is for public comments on the proposal (to be submitted to the committee before July 15. The committee will hold a roundtable at the NY Fed on June 21 to facilitate discussion.  

The London Interbank Offered Rate (LIBOR) is used internationally as well. Contracts and loans tied to the non-USD LIBOR market are estimated to be, if anything, slightly larger than the USD-LIBOR market.  It is not immediately clear the extent to which the US committee is coordinating efforts globally.  However, it appears that Eurosystem officials think that reforming the Euribor market is possible and a replacement unnecessary, for example. 

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