By Simon Miller
The chairman of the US Commodity Futures Trading Commission Gary Gensler has called on a rate with observable transactions to replace Libor.
Speaking via video link to the European Parliament's Economic and Monetary Affairs Committee Gensler questioned whether Libor could be mended following the fining of Barclays for manipulation and investigations into other banks involved in the setting of the inter-bank lending rate.
He commented: "I believe it is critical that benchmark rates rely upon observable transactions. A rate that relies upon observable transactions is anchored by the reality of that price discovery, A rate that relies on observable transactions has a lit path to credibility."
"The question is can Libor be sufficiently mended, or is this a circumstance where it's better to be replaced with a rate based on observable transactions? Such alternatives exist, including the overnight index swap rate and repo rates," Gensler asked.
Gensler added that if the market was to move to a replacement then it would be critical to have an appropriate transition for those using Libor for borrowing,lending or hedging.
He said that broad market input would be necessary to establish protocols and market mechanisms for such transition.
"Any such transition should ensure the ability to smoothly migrate so borrowers, lenders and hedgers are least affected by a possible change," Gensler added.
He concluded: "It is time for a healthy benchmark anchored in actual, observable market transactions. It is time to restore the confidence of people around the globe that the rates at which they borrow and lend money and hedge interest rates are set honestly and transparently."