The former London Stock Exchange (LSE) head of post-trade services has raised concerns over proposals to anchor LIBOR's replacement in proxy data that could prove unreliable in a stressed market.
Kevin Milne, now CEO of benchmark provider RVS QED, raised concerns over a Bank of International Settlements (BIS) proposal – cited by CFTC chairman Gary Gensler this week – to anchor the new benchmark in overnight swaps rate (OIS) or repo rates.
"In a stressed market, these correlations break first," said Milne. "In the recent past, the repo market has been a pretty good proxy for borrowing but the the proposed European financial transaction tax (FTT) could dry up the market altogether. If there's no repo market, a repo-based imputed rate won't be representative. Now the best proxy is OIS but next year it could be forward FX."
His comments came after Gensler described LIBOR's continued existence as "unsustainable", saying the alternative "must be based on facts, not fiction".
Speaking in London on Monday, Gensler said a lack of transactions in the interbank lending market, along with weak governance structures, had undermined market integrity and left the benchmark "prone to misconduct".
Stoxx last week launched what it claimed was a rules-based alternative to LIBOR and EURIBOR that takes into account the shift from unsecured to secured lending. The euro-denominated STOXX GC Pooling Indices, a co-effort with Eurex repo, is based on transactions in the regulated €150 billion GC Pooling market.
Martin Wheatley, head of UK regulator the Financial Conduct Authority, which this month replaced the Financial Services Authority, has pointed out that removing LIBOR without identifying an alternative could jeopardise often long-term contracts that use it as a reference rate. In an apparent address to those concerns, Gensler said this week the new benchmark would initially run in parallel with LIBOR to ensure a smooth transition.
Milne this week suggested a short-term fix could be based on corroboration of offered figures based on previous 24 hours' data. "At the very least it can be supported post-submission by the transactional evidence," he said.