Britain will hand over administration of the London interbank offered rate to the operator of the New York Stock Exchange as regulators try to revive confidence in the scandal-hit benchmark.
NYSE Euronext will replace the British Bankers’ Association as Libor’s administrator in early 2014, the London-based lobby group that started the benchmark more than two decades ago said in a statement today. The U.K.’s Financial Conduct Authority began regulating Libor, the benchmark for more than $300 trillion of securities, in April as part of the overhaul.
The New York-based purchaser already operates Liffe, Europe’s second-largest derivatives exchange, which offers derivatives based on Libor. A government review recommended last year that the BBA should be stripped of responsibility for Libor after regulators found banks had tried to manipulate it to profit from bets on derivatives.
“The fact they are handing this to a derivatives exchange is a surprise,” Peter Lenardos, a financials and exchange analyst at RBC Capital Markets in London, said by telephone today. “It just doesn’t seem independent enough. They are taking the setting of Libor from the banks and giving it to an exchange not known as a benchmark provider.”
Barclays Plc, UBS AG and Royal Bank of Scotland Group Plc have been fined more than $2.5 billion by U.S. and U.K. regulators for rate-rigging, and more than a dozen more firms are being probed worldwide.
The U.K. government formally started the search for a replacement body to set Libor in February after the BBA formally voted to relinquish operation of the benchmark. A seven-member panel including Sarah Hogg, outgoing chairman of the Financial Reporting Council, FCA Chief Executive Officer Martin Wheatley, and the Bank of England’s Paul Fisher recommended the new administrator.
“This change will play a vital role in restoring the international credibility of Libor,” Hogg said in a statement. NYSE Euronext Rate Administration Ltd. will be a U.K. based company, and will be regulated in the U.K. by the FCA.
The rate is at present calculated by a poll carried out daily by Thomson Reuters Corp. for the BBA 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.
Under rules introduced by the FCA, the administrators of the rate and banks that participate will have to appoint a person approved by the regulator to oversee compliance. The BBA has also stopped quoting Libor for two currencies and eight maturities in a bid to make the benchmark less vulnerable to manipulation.
“Restoring confidence in Libor has been an absolute priority for the BBA,” Anthony Browne, CEO of the lobby group, said in a statement. “We have been working hard with regulatory authorities and the Government to put in place much-needed reforms to the system.”
Bloomberg LP, the parent of Bloomberg News, 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 reflect participating banks’ cost of credit. James Dunseath, a spokesman for NYSE in London, declined to comment. Officials at the BBA and Treasury also declined to comment. IntercontinentalExchange Inc. is in the process of acquiring NYSE Euronext.
Libor was first published by the BBA in 1986, the year the British Prime Minister’s “Big Bang” program of deregulation fueled a boom in London’s bond and syndicated-loan markets. Originally intended to be a simple benchmark that borrowers and lenders could use to price loans, the rate grew in importance as it was adopted as the basis for setting interest rates from mortgages and student loans to derivatives.
The BBA, whose members are among the world’s largest banks including those who contribute to Libor, was criticised by policy makers in the U.K. and the U.S. for failing to address concerns about the rate-setting process first raised by then New York Fed President Timothy F. Geithner in 2008.