Fed up with the Libor dog-and-pony show, traders are beginning to turn to other methods of ascertaining bank borrowing costs. Mostly by using twigs, string and chewing gum. Nah. Lo and behold, the latest on the next-generation Libor. (Also, please see “Five Ways To Monkey Around With Libor’s Defects” out on Bloomberg today. We’re not even kidding.)

Traders are starting to use alternative measures for borrowing costs as the British Bankers' Association struggles to keep the London interbank offered rate as the global standard.

Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits.

One option growing in popularity is overnight indexed swaps, a gauge of expectations for central bank rates. The Federal Reserve uses the one-month OIS rate to set the minimum bid level when it lends cash to banks through its Term Auction Facility. The Fed has auctioned $510 billion through the TAF since December.

"The OIS rate is something I look at a lot more closely than I used to," said Nish Popat, head of fixed income in Dubai at Emirates NBD PJSC, the Persian Gulf's biggest bank by assets. "It gives you a better idea of where the lending and borrowing level between banks is and it's a market-traded price."

Libor gained attention in August when global borrowing costs rose as the U.S. subprime-mortgage market collapsed. The BBA said April 16 it would speed up an annual review of the 24- year-old system and threatened to ban member banks found misquoting rates. It's scheduled to publish the findings of the review tomorrow.

Libor is set once a day by the BBA, which publishes the rate after asking 16 member banks how much it would cost to borrow from each other in a range of currencies. The three-month dollar OIS rate fluctuates through the day.

Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate over the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.

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