A Federal Reserve-convened committee has narrowed its search fora replacement to Libor, the inter-bank interest rate underpinningtrillions of dollars of derivatives and other lending transactionsthroughout the financial system that has been rocked by fraudscandals in recent years.

A report released Friday by the Alternative Reference RatesCommittee, a group that includes representatives from the privatesector and regulators, proposed two possible replacements for theLondon Inter-Bank Offered Rate. The U.S. central bank's benchmarkfederal funds rate was considered, but ultimately discarded as anoption because choosing it “could be seen as a constraint onchanging the monetary policy framework” in the future, according tothe report.

Jump-starting either of the proposed alternatives would requiremoving derivatives contracts that currently reference the fed fundsrate to the new rate, which would further lessen the market'sreliance on the benchmark that serves as the target of U.S.monetary policy.