The second method is known as inter-AS option B or 2547bis option B, after IETF RFC 4364—BGP/MPLS IP Virtual Private Networks (VPNs) (February 2006). This method uses BGP to signal VPN labels between the AS boundary routers (Figure 78). The base MPLS tunnels are local to each AS. Stacked tunnels run from end to end between PE routers on the different ASs. This method provides greater scalability, because only the BGP RIBs store all the inter-AS VPN routes.
Figure 78: Inter-AS Topology with End-to-End Stacked MPLS Tunnels

PE 1 assigns labels for routes to the customer sites, and distributes both the label assignments and the VPN-IPv4 routes throughout AS 42 in extended BGP update messages by means of internal MP-BGP. ASBR 2 then distributes the routes to ASBR 3 with external MP-BGP; ASBR 2 specifies itself as the next-hop address and assigns a new label to the route so that ASBR 3 can properly direct traffic. ASBR 3 propagates the routes by internal MP-BGP throughout AS 35, including to PE 4.
Example
You can use the show ip bgp vpn all field in-label and show ip bgp vpn all field out-label commands in the context of each VPN element to display the in label and out label associated with the route at that point. Suppose that CE 1 advertises a route to prefix 10.10.10.11/32 to its external BGP peer PE 1 (10.2.2.2) in VRF A. PE 1 associates the label 16 with this route; an extended update message sent to internal MP-BGP peer ASBR 2 carries this information as a labeled VPN-IPv4 prefix (label 16, RD 100:0, IPv4 prefix 10.10.10.11/32).
host1:pe1#show ip bgp vpn all field in-label Prefix In-label 10.10.10.11/32 16
On PE 1, no out label is associated with the IPv4 prefix 10.10.10.11/32.
host1:pe1#show ip bgp vpn all field out-label Prefix Out-label 10.10.10.11/32 none
ASBR 2 receives the labeled VPN-IPv4 prefix and generates a new label, 44, to associate with this VPN-IPv4 prefix instead of label 16 when it sends the prefix to ASBR 3.
host1:asbr2#show ip bgp vpn all field out-label Prefix Out-label 10.10.10.11/32 16
host1:asbr2#show ip bgp vpn all field in-label Prefix In-label 10.10.10.11/32 44
ASBR 2 receives MPLS frames with label 44 (the in label) from ASBR 3 and sends MPLS frames with label 16 (the out label) to PE 1.
The inter-AS next hop shows label 44 as the label advertised to inter-AS peer ASBR 3. Label 44 was generated for the indirect next hop PE router/label pair, 10.2.2.2 (PE 1) and 16. Indirect next hop 1.1.1.1 is for the MP-IBGP peering between PE 1 (loopback address 1.1.1.1) and ASBR 2. Indirect next hop 10.5.5.5 is ASBR 3.
host1:asbr2#show ip bgp vpn all next-hops
Indirect next-hop 1.1.1.1
Resolution in IP route table of VR
IP indirect next-hop index 10
Reachable (metric 3)
Number of direct next-hops is 1
Direct next-hop ATM6/1.20 (10.20.20.1)
Resolution in IP tunnel-route table of VR
MPLS indirect next-hop index 29
Reachable (metric 3)
Number of direct next-hops is 1
Direct next-hop: MPLS next-hop 23
Reference count is 1
Indirect next-hop 10.5.5.5
Resolution in IP route table of VR
IP indirect next-hop index 5
Reachable (metric 0)
Number of direct next-hops is 1
Direct next-hop ATM6/0.21 (10.5.5.5)
Resolution in IP tunnel-route table of VR
MPLS indirect next-hop index 14
Reachable (metric 0)
Number of direct next-hops is 1
Direct next-hop ATM6/0.21.mpls
Reference count is 3
host1:asbr2#show mpls next-hop 23
MPLS next-hop: 23, label 33 on ATM6/1.20, nbr 10.20.20.1
Sent:
0 packets
0 bytes
0 errors
0 discards
host1:asbr2#show mpls next-hop 29 MPLS next-hop: 29, resolved by MPLS next-hop 23, peer 1.1.1.1 MPLS next-hop: 23, label 33 on ATM6/1.20, nbr 10.20.20.1 Statistics collection is disabled
host1:asbr2#show mpls forwarding brief .... 44 bgp swap to 16, push 34 on ATM6/1.20, nbr 10.20.20.1
host1:asbr2#show mpls forwarding label 44
In label: 44
Label space: platform label space
Owner: bgp
Spoof check: router ASBR2
Action:
MPLS next-hop: 30, label 43, resolved by MPLS next-hop 29
MPLS next-hop: 29, resolved by MPLS next-hop 23, peer 1.1.1.1
MPLS next-hop: 23, label 34 on ATM6/1.20, nbr 10.20.20.1
Statistics:
0 in pkts
0 in Octets
0 in errors
0 in discard pkts
ASBR 3 in turn generates a new label, 50, to advertise with the VPN-IPv4 prefix to its internal MP-BGP peer inside its autonomous system, AS 35. Indirect next hop 4.4.4.4 is for the MP-IBGP peering between PE 4 (loopback address 4.4.4.4) and ASBR 3. Indirect next hop 10.5.5.50 is ASBR 2.
host1:asbr3#show ip bgp vpn all field out-label Prefix Out-label 10.10.10.11/32 44
host1:asbr3#show ip bgp vpn all field in-label Prefix In-label 10.10.10.11/32 50
host1:asbr3#show ip bgp vpn all next-hops
Indirect next-hop 4.4.4.4
Resolution in IP route table of VR
IP indirect next-hop index 11
Reachable (metric 3)
Number of direct next-hops is 1
Direct next-hop ATM4/0.33 (33.33.33.2)
Resolution in IP tunnel-route table of VR
MPLS indirect next-hop index 28
Reachable (metric 3)
Number of direct next-hops is 1
Direct next-hop: MPLS next-hop 22
Reference count is 1
Indirect next-hop 10.5.5.50
Resolution in IP route table of VR
IP indirect next-hop index 4
Reachable (metric 0)
Number of direct next-hops is 1
Direct next-hop ATM6/1.21 (10.5.5.50)
Resolution in IP tunnel-route table of VR
MPLS indirect next-hop index 11
Reachable (metric 0)
Number of direct next-hops is 1
Direct next-hop ATM6/1.21.mpls
Reference count is 3
host1:asbr3#show mpls forwarding brief ... 50 bgp swap to 44, on ATM6/1.21
In turn, ASBR 3 receives MPLS frames with label 50 (the in label) from PE 4 and sends MPLS frames with label 44 (the out label) to ASBR 2.
PE 4 receives the VPN-IPv4 prefix with label 50:
host1:pe4#show ip bgp vpn all field out-label Prefix Out-label 10.10.10.11/32 50
On PE 4, no in label is associated with the IPv4 prefix 10.10.10.11/32.
host1:pe4#show ip bgp vpn all field in-label Prefix In-label 10.10.10.11/32 none
The labels that are generated to be sent to the inter-AS BGP peers are generated for each next-hop PE router/received label tuple. Scaling is improved when all routes advertised from a given VRF have the same label; this is the default E-series router behavior. You can disable this behavior by issuing the ip mpls forwarding-mode label-switched command for the VRF.