Overhaul outlined for tarnished Libor

PUBLISHED : Saturday, 29 September, 2012, 12:00am
UPDATED : Saturday, 29 September, 2012, 2:32am

Oversight of the London interbank offered rate will be handed to Britain's financial regulator under proposals designed to revive confidence in a benchmark tarnished by scandal.

The British Bankers' Association should be stripped of the responsibility for managing the rate and other organisations invited to replace it, Financial Services Authority managing director Martin Wheatley said yesterday.

More than 100 Libor rates tied to currencies and maturities where there is not enough trading data to set them properly should be scrapped, and a code of conduct, backed by criminal penalties, introduced for how lenders contributed to setting it, he said.

"Governance of Libor has completely failed," Wheatley said as he unveiled a report on the future of Libor. "This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system."

Wheatley began his review at the request of Chancellor of the Exchequer George Osborne after Barclays, Britain's second-biggest lender, paid a record £290 million (HK$3.65 billion) fine in June for manipulating Libor, which is used to set rates for more than US$300 trillion of securities.

The Financial Services Authority should receive greater powers to vet bankers who contribute to the rate, according to Wheatley.

He stopped short of advocating scrapping Libor, saying that would be too disruptive to borrowers whose existing contracts referenced the rate.

"Repealing Libor was just not an option," said Simon Maughan, a banking analyst at Olivetree Securities. "He's done the right thing here.

"Improve it, make it based on real transaction costs, get rid of some of the currencies, that seems like a sensible approach."

Libor is calculated by a poll carried out daily by Thomson Reuters on behalf of the bankers association that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies.

Wheatley said the authority would encourage more banks to submit quotes as part of the revamp.

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 was thin, he said.

The "first priority" of Libor's new administrator would be to create a code of conduct for rate submitters, with specific guidelines that the submissions be corroborated by trade data.

Financial Secretary to the Treasury Greg Clark said the report was "very sound" and the government would try to introduce the required changes early next year.