Proposals to overhaul Libor, including enhanced powers for U.K. regulators to prosecute rate rigging, may be enacted early next year in a bid to revive confidence in the scandal-ridden benchmark and banking industry.
Financial Services Authority Managing Director Martin Wheatley’s “appropriate and credible” recommendations will be placed into legislation that should be approved early next year, Greg Clark, financial secretary to the U.K. Treasury, said in a telephone interview in London today. Wheatley proposed stripping the British Bankers’ Association of responsibility for the rate and adopting criminal penalties for interest-rate manipulation.
Wheatley began the review after Barclays Plc (BARC) paid a record 290 million-pound ($470 million) fine in June for manipulating the London interbank offered rate, used to set rates for more than $300 trillion of securities. At least a dozen banks are being probed worldwide over allegations they colluded to manipulate the benchmark to profit from bets on derivatives.
The review “could mark at least the end of the beginning of the clean-up operation,” Andrew Tyrie, chairman of a lawmaker panel on finance, said in an e-mailed statement. The reforms could help restore “trust, both in Libor and in banking.”
Wheatley said some measures, including a tender for groups to bid to manage Libor and the phasing out of some currencies and maturities from the benchmark, will begin immediately.
“Governance of Libor has completely failed,” Wheatley said as he unveiled the report on the future of Libor in London today. “This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.”
Libor is calculated by a poll carried out daily by Thomson Reuters Corp. on behalf of the BBA, a banking industry lobby group, that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.
Libor is the biggest of a series of scandals to hit London’s financial industry, denting public trust in the industry.
Kweku Adoboli, a former UBS AG (UBSN) trader, went on trial this month for allegedly causing a $2.3 billion unauthorized trading loss. Standard Chartered Plc paid $340 million last month to settle allegations by New York’s banking regulator that it laundered $250 billion for Iran and HSBC Holdings Plc (HSBA) is also being probed over handling cash for sanctioned nations.
The FSA should receive greater powers to vet bankers who contribute to Libor, said Wheatley, who will become the chief executive officer of the Financial Conduct Authority, when the FSA splits into two agencies next year.
“With Libor being such an intrinsic part of the financial system, restoring trust in it is an important step towards the broader task of rebuilding confidence in banking,” Matthew Fell, director for competitive markets at the Confederation of British Industry, said in an e-mail. “Bringing Libor under an independent regulator will take away the notion that this was a system run by banks for the benefit of banks.”
Wheatley stopped short of advocating scrapping Libor, saying that would be too disruptive to borrowers whose existing contracts reference the rate.
“Repealing Libor was just not an option,” said Simon Maughan, a banking analyst at Olivetree Securities Ltd. in London. “He’s done the right thing here,” he said. “Improve it, make it based on real transaction costs, get rid of some of the currencies, that seems like a sensible approach.”
The FSA will encourage more banks to submit quotes as part of the revamp, Wheatley said, and could force uncooperative banks to submit quotes with its new powers.
The number of Libor reference rates should be cut to 20 from 150 within a year by phasing out currencies and maturities in which trading is thin, Wheatley said. Publication of Libor for Australian, Canadian and New Zealand dollars, as well as the Danish Kroner and Swedish Kronor should be ended, he said.
Four-month, five-month, seven-month, eight-month, 10-month and 11-month rates should be axed, while eliminating one week, two-week, two-month and nine-month tenors should also be considered, according to the proposals.
Banks will also have to follow a code of conduct governing how they make daily submissions. Rate-setters will have to base inputs on a hierarchy of data points, starting with actual transactions in the unsecured inter-bank deposit market, Wheatley said. Where none exist, banks should then consider any borrowings in other instruments including commercial paper, repurchase agreements and overnight-index swaps.
Wheatley also proposed banks wait three months before disclosing publicly their own Libor submissions. To rectify the “reduction in immediate transparency” he recommended lenders publish a regular bulletin that includes trading volumes.
The tender process to take responsibility for setting Libor will start next week and be run by an independent committee led by Sarah Hogg, the chairwoman of the Financial Reporting Council. Wheatley said the bidding should take about three months.
The BBA’s role as guardian of Libor has been under pressure since the Bank for International Settlements first raised concern in 2008 that the benchmark was being manipulated.
“Many respondents thought that the current position of the BBA is untenable due to its loss of credibility from past involvement in Libor and its vested interest in defending the banks,” the report said. “The BBA acts as the lobby organisation for the same submitting banks that they nominally oversee, creating a conflict of interest that precludes strong and credible governance.”
Other benchmarks, such as for the prices of agricultural products, oil and precious metals, and in the equity, bond and money markets, should be looked at as well, Wheatley said.
The European Union, which is conducting its own review of interest-rate benchmarks, including Euribor, said that any solution must apply across a wide range of markets.
“Concerns about benchmarks are not limited to interest rate benchmarks, but extend to all kinds of benchmarks, including commodity and benchmarks for other markets,” the EU said in a statement.
Dan Doctoroff, CEO of Bloomberg LP, has proposed an alternative to Libor dubbed the Bloomberg Interbank Offered Rate, or Blibor. It would use data from a variety of financial transactions to better reflect participating banks’ real cost of credit. Bloomberg LP is the parent of Bloomberg News.
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