Martin Wheatley, the head of the U.K. markets regulator, said the London interbank offered rate should eventually be replaced with a transaction-based benchmark using a dual-track system.
The tarnished benchmark, based on a daily survey of panel banks, should run in parallel with a transaction-based rate until a full overhaul of the system can be enacted, Wheatley, chief executive officer of the Financial Conduct Authority, said, according to FCA spokesman Chris Hamilton.
Wheatley’s proposals contrast with Gary Gensler, the chairman of the U.S. Commodity Futures Trading Commission, who said in a speech in London last month that interest-rate benchmarks such as Libor and Euribor are “unsustainable in the long run” and need to be replaced with rates that are based on real data.
Global regulators are working on alternatives to Libor after U.S. and U.K. officials uncovered attempts by banks to manipulate Libor. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined a total of about $2.5 billion and at least a dozen firms remain under investigation.
Wheatley has said the market should dictate how much Libor is used in the future. The benchmark could be replaced with the parallel rate system as soon as next year, Wheatley said. His comments were first reported in the Financial Times.
Gensler and Wheatley are leading a panel on behalf of the International Organization of Securities Commissions into how global benchmarks can be strengthened. In a report last month, the panel said market benchmarks should be based on data from actual trades in a bid to restore credibility.
They are also pushing for banks involved in benchmark setting to sign up to a code of conduct as part of a drive to make the process more robust.
The European Union, which is also investigating benchmark-rigging, will propose tougher regulation of the rates. Michel Barnier, the EU’s financial services chief, said in an e-mail today that “to the greatest extent possible,” the market should use indexes that are based on real transactions.
Barnier said the use of estimates in benchmarks shouldn’t be outlawed entirely because of the need to allow for situations where there is a lack of real transaction data and also because such a move would affect many existing contracts.
The plans would “bring about more transparency, reduce conflicts of interest, and ensure that benchmarks are representative,” Barnier said. The new rules will be backed by fines, and will be in line with international standards prepared by market regulators, he said.
Other interbank lending rates, as well as benchmarks used in the $379 trillion swaps market, have come in for scrutiny. The CFTC is also probing suspected rigging of the ISDAFix rate used as reference for derivatives trades.
Iosco, which brings together markets regulators for more than 100 nations to coordinate their rule-making, will seek industry feedback on the proposals through May 16, 2013. Another group of global watchdogs, the Financial Stability Board, will issue a report in July on progress in identifying alternatives to tarnished benchmarks, and on steps to improve oversight of rate setting.
The review follows concerns expressed by regulators that Libor was undermined in part because banks submit estimates for how much it would cost to borrow from each other, rather than real transaction data.
Regulatory oversight of Libor was handed to Wheatley’s FCA about six months after he proposed wide-ranging changes to the benchmark interest rate in September. The so-called Wheatley Review recommended scrapping more than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly and creating a code of conduct for lenders contributing to the rate.