LONDON (Reuters) – Bank of England Governor Mark Carney hopes the adoption of a new interest rate benchmark as an alternative to Libor, the benchmark tarnished by a rigging scandal, will create a new “ecosystem” of financial products.
The BoE and major dealers have backed Sonia, the sterling overnight index average, as its preferred “near risk-free” interest rate benchmark in sterling derivatives and other financial contracts.
“Over time the private sector will develop a wider range of products referencing Sonia. Futures contracts have already been created,” Carney said in a speech delivered at Bloomberg’s offices in London.
“We can expect Floating Rate Notes and loans referencing SONIA to follow. The end point should be an ecosystem for interest rate markets which has an altogether healthier foundation than at present.”
After banks were fined for rigging Libor, an interest rate the industry compiled itself at the time, central banks sought alternatives that were harder to manipulate.
The BoE took over responsibility for Sonia in 2016 and wants it to replace Libor completely by the end of 2021. Sonia reflects bank and building societies’ overnight funding rates in the sterling unsecured market.
Carney also said more needed to be done to counter misconduct in the financial sector.
(Reporting by David Milliken, writing by Andy Bruce)