LONDON (Reuters) - Major dealers have backed the broader use of a Bank of England interest rate benchmark as an alternative to Libor, a rate that was tarnished by a rigging scandal.
Support for SONIA, the sterling overnight index average, as its preferred "near risk-free" interest rate benchmark in sterling derivatives and other financial contracts, will improve the resilience of the financial system, the BoE said on Friday.
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. It reflects bank and building societies' overnight funding rates in the sterling unsecured market.
"Work must now begin on planning for the widespread adoption of SONIA, in consultation with a broader set of market participants," said Chris Salmon, the BoE's executive director for markets.
"This will lead to more effective interest rate hedging markets for end-users, while minimising opportunities for misconduct."
A working group of major dealers voted this month to recommend the use of SONIA over two other "near risk-free" alternatives, the BoE said.
The recommendation will be put to a market consultation in the middle of this year.
Libor has already been reformed, with much stricter criteria for scrutinising rate submissions from banks, and the actual rate now compiled by an independent administrator.
Reporting by Huw Jones; editing by Alexander Smith