The United States Treasury Department would like to break themarket of its Libor addiction.

The London Interbank Offered Rate, a measure of the interestbanks claim to charge one another to loan money, is tied to anestimated $350 trillion of notional value derivative contracts and$10 trillion in loans. It's also been under attack since before thefinancial crisis as banks admitted to rigging it to benefitfinancially. Now Daleep Singh, acting assistant secretary forfinancial markets for the U.S. Treasury, wants users to move to anew benchmark for global interest rates.

“If you are a user of Libor, and I'm sure nearly all of you are,I ask you to think about whether it's really the best choice foryour purposes,” Singh told a roomful of executives at the FuturesIndustry Association conference in Chicago Thursday. “If you areborrowing money in an adjustable-rate loan, does it make sense toyou that your interest rate will go up if the market starts to viewa handful of banks as less creditworthy on average?”

The Treasury Department supports two alternatives that receivedthe backing of the Alternative Reference Rates Committee in May,according to Singh. The first is the overnight bank fundingrate, which is published by the New York Fed. The second is theovernight Treasury GC repo-based rate.

The OBFR has been in use since March, with 10 years of simulatedback history available, Singh said. While the Treasury GC repo-rateis still being developed, the large number of transactions in thesecured funding market make it a “significant potential benefit,”he said.

“We believe a transition to an alternative reference rate, whichmay involve short-term costs, is clearly in the collective interestof financial institutions, market participants, consumers, andpolicymakers,” Singh said.

The daily Libor rate was set by a panel of 16 banks based onsubmissions that were supposed to reflect borrowing rates in theinterbank market. It was calculated by averaging the middle eightsubmissions. The U.S. has alleged that traders manipulated theirbank's submissions to increase the profitability of their tradingpositions.

The U.S. Libor probe has now led to charges against more than adozen bankers and brokers. Of those, two former Rabobank Groeptraders were convicted at trial while others — including three fromRabobank and one from Deutsche Bank — pleaded guilty.

The oversight of Libor, previously managed by the BritishBankers Association, was taken over by Intercontinental ExchangeInc. after international regulators sought to improve how themeasure is calculated. Part of the change by Intercontinental's ICEBenchmark Administration unit has been to include more realtransactions in how Libor is set.

“The reforms to strengthen Libor by IBA are important and needto continue, but in parallel we need to develop an alternative,”Singh said in an interview after his speech. That will allow themarket “in an orderly way” to shift to a Libor alternative, hesaid, with “market forces facilitating that transition.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.