Global policymakers say further reforms to major interest rate benchmarks, and the development of new benchmarks, is needed in order to restore investor confidence and reduce systemic risk.

The Financial Stability Board (FSB) Tuesday published its plans for strengthening the existing major interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR; and, it set out recommendations for the development of alternative benchmarks. The recommendations include ensuring that the existing benchmarks are based on actual transaction data; and, developing alternative, risk-free rates that are needed as reference rates for certain transactions, including many derivative transactions.

This work is critical to financial markets, it suggests, in the wake of the market manipulation scandal involving financial benchmarks, which has undermined confidence in these metrics, and the financial system as a whole. “The cases of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets, have lowered confidence in the reliability and robustness of existing benchmark interest rates. Uncertainty surrounding the integrity of these reference rates represents a potentially serious source of vulnerability and systemic risk,” notes the FSB.

The FSB says that it will work with the private sector to implement new designs and methodologies for the existing benchmarks; and, that it will develop viable near risk-free rates. It says that by the end of 2015, benchmark administrators should have publicly consulted on any recommended changes to the existing benchmarks. As for the new risk-free rates, it suggests that central banks and regulators should encourage the industry to implement at least one risk-free rate by the second quarter of 2016.

The recommendations from the FSB follows a report from the International Organization of Securities Commissions (IOSCO), which looked at the existing work on benchmark reform to date; and, concluded that the reforms adopted so far have “raised the overall oversight, governance, transparency and accountability” of the major benchmarks and their administrators, which “has undoubtedly improved the quality and integrity of the three benchmarks.”

However, it also found that further work is needed on the benchmarks’ methodology and design. And, in particular, it said that the administrators of LIBOR and TIBOR “need to devote more attention to the management of conflicts of interests.” It stressed that more work needs to be done to ensure that the underlying data used to construct a benchmark is “sufficient to accurately and reliably represent the interest measured by the benchmark.”

IOSCO has made its own recommendations for each administrator of the existing major interest rate benchmarks on remedial action. It says that it expects each administrator to come up with a plan to address these issues by the end of 2014.

“I am pleased that the recommendations by IOSCO and the FSB reflect many of the reforms to LIBOR we’ve already put in place. But a new framework is just one part of the equation – what people will want to see is evidence of good conduct,” said Martin Wheatley, CEO of the UK’s Financial Conduct Authority (FCA) and co-chair of the IOSCO board Task Force on Financial Benchmarks.