Lobbyists for the banking and asset-management industries are pushing for greater regulation of Libor and are resisting pressure to replace the benchmark in the wake of the rate-rigging scandal.
Firms and employees who contribute to interest rates should be regulated, the Investment Management Association, the Global Financial (DLLR) Markets Association and the International Capital Market Association said in separate submissions to the Financial Services Authority’s review of the rate. Replacing Libor with an alternative rate or significantly changing how it’s calculated would be too disruptive and should be avoided, they wrote.
FSA managing Director Martin Wheatley is reviewing how the London interbank offered rate is set after Barclays Plc (BARC) was fined a record 290 million pounds ($464 million) in June for rigging the benchmark. The London interbank offered rate, overseen by the London-based British Bankers’ Association, is the basis for more than $300 trillion of securities worldwide.
“We would strongly prefer the correction of the current deficiencies in Libor over a solution that requires any transition or migration to other benchmarks,” the IMA, which represents British fund managers, said in a statement. “This will involve the wholesale reorganization of the governance of Libor, placing the regulator at the heart of the process.”
Wheatley, who started consulting with banks and users of Libor last month, is scheduled to present his findings to the Treasury by the end of September. Separately, Bank of England Governor Mervyn King today said global central bankers will set up their own separate inquiry into Libor.
The benchmark is determined by a daily poll carried out on behalf of the BBA by Thomson Reuters Corp. that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. At least a dozen firms are being probed worldwide over allegations they manipulated the rate to profit.
In cases where contributors to a benchmark aren’t already regulated, laws should be passed to ensure participants adhere to the correct standards, said the GFMA, which is backed by the Association for Financial Markets in Europe, the Asia Securities (ASP) Industry and Financial Markets Association and the Washington- based Securities Industry and Financial Markets Association.
Individuals who make submissions to benchmark rates should also be approved by regulators and subject to the FSA’s rules on remuneration, according to the IMA. Those rules require banks to pay bonuses to senior employees over a number of years and include measures to claw back bonuses after they are awarded.
The three bodies all resisted calls to replace Libor with alternative rates or widen the pool of eligible transactions to include secured borrowing, such as repo transactions.
The ICMA, which represents 420 European banks and asset managers, said it was “particularly concerned” by the potential for disruption that changes to Libor could cause for existing securities that reference the rate.
“It is highly impractical to make changes to the use of Libor within outstanding contracts,” the lobby group said in an e-mailed statement.
Wheatley said in an Aug. 10 interview that material changes to the way Libor is calculated would risk invalidating millions of financial contracts, covering products ranging from mortgages to derivatives. He said banks that set the Libor interest rate are seeking a “scientific” process that will limit future liability from the scandal-ridden benchmark.
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