GOVERNMENT REGULATION of a cornerstone of financial markets has moved closer after a British banking body agreed to surrender its decades-long role in overseeing Libor, the scandal-riven global benchmark for borrowing costs.
The British Bankers’ Association formally voted to cede its role last week, more than four years after questions were first raised about whether banks were lying in their submissions to the rate-setting that governs $350 trillion in contracts worldwide.
The move came at the request of UK officials who plan to announce a new regulatory structure for the process as part of a package of reforms due to be announced on Friday, two people familiar with the process said. The rates serve as benchmarks for everything from US home mortgages to complex derivative transactions worth billions of dollars.
Martin Wheatley, managing director of the Financial Services Authority, has been leading a review aimed at restoring confidence after Barclays paid £290 million to settle allegations it had tried to manipulate Libor and Euribor, a similar interbank rate set in Brussels.
More than a dozen other banks and financial institutions are being investigated on three continents for similar allegations. UBS said it had received partial immunity for working with investigators, and Royal Bank of Scotland has said it expects to reach a settlement.
The BBA has been gradually backing away from the rate-setting process since 2008, when some analysts complained banks were understating Libor submissions.
It said in a statement: “The BBA seeks to work with the Wheatley review team as they complete their consultation on the future of Libor. If Mr Wheatley’s recommendations include a change of responsibility for Libor, the BBA will support that.”
Libor rates are set daily in 10 currencies and 15 time periods by asking panels of banks to estimate the cost at which they think they can borrow. The top and bottom submissions are thrown out and the rest are averaged.
The BBA serves as a sponsor and Thomson Reuters performs the calculations. Both Bloomberg and NYSE Euronext have volunteered in submissions to the Wheatley review to take over Libor administration.
The European Banking Federation has no plans to step back from Euribor, the rate it sponsors. Unlike the BBA, which is made up of individual banks, the EBF draws members from national banking associations. “There is no comparison with the Libor case,” an EBF spokesman said. “Our stakeholders are national associations and not the banks themselves, this prevents any potential conflict of interest . . .”
Neither the FSA nor BBA would say how Libor will be set and sponsored in the future. Gary Gensler, chairman of the US Commodity Futures Trading Commission, which led the Libor probe, said the rates needed to be reformed or replaced quickly.
