European Union lawmakers and U.K. regulators are continuing to look at ways to tighten up procedures surrounding the setting of the Libor interbank rate, including criminal sanctions, as one U.S. exchange has begun trialling what some market participants believe could be used as an alternative to the benchmark interest rate.

Last month, Barclays was hit with a record fine of $451 million in the U.K. and U.S. after Britain’s second biggest bank admitted to manipulating the London interbank lending rate (Libor) from 2005-2009 to the benefit of its derivative positions, as well as by a desire to make the bank look stronger during the financial crisis

Libor, which serves as a fundamental benchmark to around $800 trillion of financial contracts around the world and is commonly used for Sterling and U.S. dollar denominated instruments, is a notional rate set by a 16-bank panel based in London. Members of the panel of international banks are all asked how much it would cost to borrow from one and other and the rate is then calculated and published daily by market data vendor Thomson Reuters on behalf of the British Bankers’ Association, a trade association for the U.K. banking and financial services sector, covering a variety of currencies and time durations.

Libor and other benchmark lending rates, such as Euribor that is used for euro denominated agreements, which are worked out in the U.K., are the subject of ongoing investigations by regulators in North America, Europe and Japan. It is likely that not just Barclays will be caught up in the scandal, which could lead to lawsuits and fines costing many billions of dollars for any guilty banks.

Up until now, criminal prosecutions could not be sought over the manipulation of Libor in the U.K and Europe, but the European Union today announced that it had toughened up its market abuse regulations to penalize individuals involved in the rate-fixing scandals like Libor and Euribor. In the U.S., the Justice Department is stepping up its own investigation into the scandal by building criminal cases against several financial institutions. Barclays traders involved in allegedly manipulating Libor rates could face possible U.S. charges.

“The international investigations under way into the manipulation of Libor have revealed yet another example of scandalous behavior by the banks,” said Michel Barnier, the European Union’s financial services commissioner. “I wanted to make sure that our legislative proposals on market abuse fully prohibit such outrages. That is why I have discussed this with the European Parliament and acted quickly to amend our proposals, to ensure that manipulation of benchmarks is clearly illegal and is subject to criminal sanctions in all countries.”

Arlene McCarthy, a left-of-center U.K. MEP who is vice-chair of the European parliament’s Economics and Monetary Affairs Committee and who is responsible for drafting the new market abuse rules, added: “This is an international problem and we need to ensure we set tough rules in both the U.S. and European Union. During my recent visit to the U.S., I met with the U.S. Commodity Futures Trading Commission and we exchanged ideas on how we can toughen up our rules on this abuse.

“We must ensure we have a robust legal and regulatory framework to prevent future manipulation or abuse and its potentially devastating consequences for the European and global economy. Without this we will not end the continued crisis of confidence in banks and financial markets.”

Lord Turner, chairman of the Financial Services Authority, the U.K. regulator, believes that the Libor malpractices are most probably now a thing of the past, but hints that a more transparent system may need to be adopted in the future. The U.K. government has already ordered an independent review into the future operation of Libor.

“I would be very amazed if at the moment there is anything remotely like the problems of the past in terms of deliberate manipulation but that still leaves us the problem of superstructure built on an inherently judgmental and thin market,” said Turner.

Meanwhile, NYSE Liffe U.S., the futures exchange operated by NYSE Euronext, yesterday announced that it had successfully completed the first full week of trading in a new index that could, over time, become a replacement for Libor.

The DTCC GCF Repo index, which lists the daily interest rates for the general collateral finance repurchase agreements market, saw 19,959 contracts traded, valued at $100 billion, with 10,980 lots of open interest by the end of the first week of trading on July 20.

The GCF Repo uses actual prices from a large volume of real-life trades among banks, whereas Libor is based on banks’ own estimates of their future borrowing costs. The Securities Industry and Financial Markets Association (Sifma), an industry trade group, is backing the rate, which is published daily, and is cleared through the Depository Trust & Clearing Corp (DTCC), the US post-trade group.

“We are extremely encouraged by the industry’s positive reception to the launch of our futures on the DTCC GCF Repo Index,” said Tom Callahan, chief executive of NYSE Liffe U.S.. “The strong initial volume, widespread client participation, rapid growth of open interest and mature market quality across these products in only their first week of trading shows their promise as a new, reliable short-term interest rate benchmark.”