U.K. Will Implement Wheatley Plan for Libor Overhaul in Full

FSA Managing Director Martin Wheatley
The FSA Managing Director Martin Wheatley's recommendations to overhaul the setting of the London Interbank Offered Rate have been accepted by the U.K government "in full". Photographer: Simon Dawson/Bloomberg

The U.K. government said it will implement “in full” recommendations from Martin Wheatley of the Financial Services Authority to overhaul the setting of the benchmark London interbank offered rate.

The Treasury said in London today that it will enshrine in law the way Libor is set, create a criminal offense for those who misreport it and give regulators the power to oversee the setting of the rate and other financial-industry benchmarks. The British Bankers’ Association, the industry lobby group that compiles Libor, will give way to a new rate-setting panel.

“The overwhelming and urgent imperative then is to rebuild trust,” Treasury minister Greg Clark said in a speech in London. “The system of regulation that we’ve had for the last decade was found wanting.”

Wheatley carried out a review at the request of Chancellor of the Exchequer George Osborne after Barclays Plc, Britain’s second-biggest lender, paid a record 290 million-pound ($469 million) fine in June for manipulating Libor, which is used to set rates for more than $300 trillion of securities.

At least a dozen banks are being probed by regulators worldwide over allegations they colluded to manipulate the benchmark to profit from bets on derivatives. The U.K.’s Serious Fraud Office opened a criminal case in July. U.S. investigators have asked their British counterparts for permission to interview London traders.

‘Corrodes Trust’

“The behavior that has been uncovered in the Libor scandal corrodes trust, and the behavior of a few has tainted the reputation of an industry,” Clark said earlier in a statement to Parliament.

The FSA will encourage more banks to submit quotes as part of the revamp, Wheatley, an FSA managing director, said last month, 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 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 their daily submissions. Rate-setters will have to base their inputs on a hierarchy of data points, starting with any actual transactions in the unsecured inter-bank deposit market, he 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.

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