By Ryan Tracy
WASHINGTON--The Federal Reserve met with big banks and
international regulators on Monday to discuss alternatives to the
current London interbank offered rate, or Libor, in the wake of a
rate-rigging scandal that has called the widely used benchmark into
question.
Major Wall Street banks, as well as regulators from Europe and
Japan, attended the meeting at the Federal Reserve Bank of New
York. Fed Gov. Jerome Powell, who was expected to attend, said
Monday the Fed's aim is to "start the process of choosing a
risk-free rate" as an alternative to Libor.
"The point of Libor reform is to assure that Libor is actually
grounded in real transactions rather than someone's judgment, which
will make Libor much more difficult to manipulate," Mr. Powell said
on CNBC.
Libor, the basis of interest rates on everything from corporate
loans and derivatives to mortgage rates and credit cards, has come
under scrutiny in the wake of a rate-rigging scandal that has
ensnared major financial institutions across the globe. Bank
employees are alleged to have manipulated interest rates to benefit
their trading positions, and banks were accused of reporting
artificially low rates in the financial crisis to conceal their
problems. Seven banks and brokerages have settled with regulators
over alleged manipulation, and some of their employees have been
criminally charged.
Global regulators on the Financial Stability Board are also
working to reform the way interest rates are set to make them less
susceptible to fraud. In July, the FSB outlined its continuing work
on potential alternative benchmarks. For rates in U.S. dollars, the
choices in the FSB report included U.S. Treasury rates or the rates
on certain types of repurchase agreements.
Monday's meeting included senior executives from 15 global
financial firms, such as Goldman Sachs Group Inc. and Barclays PLC,
and their regulators, such as the U.S. Commodity Futures Trading
Commission and the European Central Bank.
Mr. Powell said the Fed hopes to push new derivatives contracts
onto what he described as a "risk-free" rate over time.
"Reference rates are one of the foundations of the financial
system. Certainly, it is in the interest of everyone, from the
residential mortgage holder to the financial institutions that
heavily use these rates, that they have integrity and be well
constructed and resistant to manipulation," Mr. Powell added in a
statement posted on the Fed's website.
The Fed said it is "interested in seeing market participants
work toward alternative reference rates," and that it would also be
consulting with "a wide group of market participants" as it looks
into alternatives for use in U.S. dollar derivatives and other
contracts.
Write to Ryan Tracy at ryan.tracy@wsj.com