LIBOR is a reference rate. When two parties enter a financial contract in which interest payments are to be exchanged, they frequently choose to base those payments on LIBOR. LIBOR is currently referenced in roughly $300 trillion worth of contracts globally, which means that it is part of the global financial system’s critical infrastructure. But LIBOR’s credibility was badly undermined by the scandal that erupted when some of the banks that help produce the rate attempted to manipulate it by contributing inaccurate estimates of their borrowing costs. These illegal actions helped damage the public’s trust not just in LIBOR, but also in financial markets and institutions more broadly. In response, a number of global efforts to reform reference rates have been undertaken. LIBOR is produced and administered in London. As a result of the steps taken by the government of the United Kingdom, LIBOR is now regulated and supervised by the U.K. Financial Conduct Authority (FCA). The International Organization of Securities Commissions (IOSCO) developed a broad set of 19 principles that reference rates and other financial benchmarks are now expected to meet. Building on this work, in July, the Financial Stability Board (FSB) released a report outlining a number of further reform proposals. Continuing the work of my former Fed colleague Jeremy Stein, I recently took over as co-chair–along with Martin Wheatley, chief executive officer of the FCA–of the international group that drafted the report and is now charged with implementing its recommendations. Today I will discuss the reasons why further reforms are necessary and how those reforms should proceed, and I will focus on U.S. dollar LIBOR.As is made clear in the FSB report, while the goals and principles of the official sector participants are uniform, specific plans for reference rate reform will vary by currency, depending on differences in markets and institutions.”
Reforming U.S. Dollar LIBOR: The Path Forward – Speech
“Thank you for giving me this opportunity to speak this evening. I would like to discuss ongoing efforts to reform the current structure and uses of the London Interbank Offered Rate, commonly referred to as LIBOR. These reforms affect not only the financial industry, but also a large number of U.S. households and corporations.
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