The U.K.’s chief markets regulator said that material changes to the way Libor is calculated risks invalidating millions of financial contracts, covering products ranging from mortgages to derivatives.
There needs to be certainty on what would happen to banks and investors if another benchmark is adopted, said Martin Wheatley, the managing director of the Financial Services Authority, who is conducting a review of the oversight and setting of the London interbank offered rate.
“Any migration to new benchmarks would require a carefully planned and managed transition in order to limit disruption to the huge volume of outstanding contracts that reference Libor,” Wheatley said following a speech at Bloomberg LP’s office in London today.
Wheatley, 53, is conducting the review after Barclays Plc (BARC), the U.K.’s second-largest bank, was fined 290 million pounds ($453 million) by U.S. and U.K. authorities in June. Libor is the most frequently utilized benchmark for interest rates globally, referenced in transactions with a value of at least $300 trillion.
Barclays admitted to attempting to rig rates to benefit its own derivatives trades and to appear healthier during the financial crisis. At least 12 banks, including Royal Bank of Scotland Group Plc (RBS) and Deutsche Bank AG, are being investigated for manipulating Libor and related benchmarks around the world.
The banks “are very clearly apprehensive because of the record fine that was pinned on Barclays,” Wheatley, who is designated to become chief executive officer of the Financial Conduct Authority when the FSA is split in two next year, said in a separate interview yesterday. “They want as quickly as possible to have a Libor that works and doesn’t expose them” to regulatory and legal risks.
U.K. Chancellor of the Exchequer George Osborne called for the review and said Wheatley’s report would form the basis for amendments to legislation currently making its way through Parliament.
In a discussion paper tied to the review, Wheatley proposed that sanctions for manipulating Libor could be strengthened, a code of conduct could be introduced for banks submitting figures for the benchmark and that the process be overseen by a regulator rather than the British Bankers’ Association.
“This discussion paper demonstrates that we will give regulators the powers they need to prevent the manipulation of key benchmark rates in the future,” said Mark Hoban, Financial Secretary to the Treasury. “The government is also working with its international partners to inform the international work in this area and work towards a globally consistent solution.”
Regulators may need to combine actual data from interbank transactions “with a widened definition of relevant funding to include other products such as commercial paper or corporate deposits,” Wheatley said in the speech today.
Wheatley has begun consulting with banks that submit Libor rates and will seek input from the finance industry over the next four weeks. He is scheduled to present his findings by the end of September, the Treasury said.
Wheatley said banks that set the Libor interest rate are seeking a “scientific” process that will limit future liability from the scandal-ridden benchmark.
Lenders on the Libor panel, which include RBS and Barclays, would prefer Libor be set “on a very clean basis that takes their risk down,” Wheatley said. A “trade reporting mechanism” to calculate the figure based on actual data is one option he is considering as part of proposals to reform Libor released today.
At least seven authorities, including the Department of Justice, European Commission and Canadian Competition Bureau, are investigating whether banks manipulated interest rates to benefit trading positions or appear more financially sound.
Dozens of traders have been caught up in the scandal, either being fired or suspended by their employers or put under investigation by U.K. or U.S. authorities. Mitsubishi UFJ Financial Group Inc. suspended a London-based employee, the third in a month, the bank said yesterday.
“We’ve found quite a lot of bad behavior in this market and we want to fix it,” said Wheatley, who was formerly the chief executive officer of Hong Kong’s Securities and Futures Commission and a deputy CEO of the London Stock Exchange. “We want to make a credible benchmark.”
Libor is derived from a survey of banks conducted each day on behalf of the BBA in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.
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