Interest-rate benchmarks must be tied to market transactions instead of estimates to protect the global financial system against mis-allocation of capital and mismanagement of risk, according to a panel of U.S. regulators.

U.S. and overseas agencies must identify alternatives to the London interbank offered rate "that are anchored in observable transactions and are supported by appropriate governance structures," the Financial Stability Oversight Council said in a report released today.

FSOC, a council of regulators created by the Dodd-Frank Act to monitor financial-system risk, made the recommendations after three banks paid $2.5 billion in fines in a global manipulation probe. The council, led by Treasury Secretary Jacob J. Lew, also includes Federal Reserve Chairman Ben S. Bernanke and heads of agencies such as the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.