THE “BROKEN” Libor interbank lending rate will get “a complete overhaul”, including a radical pruning of the number of rates it offers, a new administrator and tough regulatory oversight, under reforms announced today.
UK regulator Martin Wheatley will announce the shake-up in a bold attempt to restore faith in the London interbank offered rate after a manipulation scandal that has engulfed more than a dozen financial institutions on three continents.
More than $300 trillion in contracts worldwide are linked to the benchmark, but its reliability has been questioned since Barclays’ £290 million settlement with British and US regulators laid bare the scale of wrongdoing.
“Today we press the reset button,” Mr Wheatley, the Financial Services Authority managing director, plans to say in a speech. “Libor needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do.”
Mr Wheatley, asked by Britain’s coalition government to replace or reform a clubby system that had outgrown both its governance structure and its roots in financial transactions, opted for the regulatory equivalent of a radical pruning. “We started out with an open mind [whether it] would be possible to move to a different rate, and the answer is no,” he told the Financial Times.
Libor will continue to depend on daily estimates from panels of banks of current interbank borrowing rates, but sponsorship will move from the British Bankers’ Association to a fully independent and regulated administrator. Lady Hogg, who heads Britain’s Financial Reporting Council, will lead the selection process.
Among sweeping reforms, Mr Wheatley’s 10-point plan calls for dropping five currencies and 130 of the 150 daily fixings. The shift allows rate-setting banks to concentrate on the rates and currencies that investors and borrowers use most.
Faced with evidence that banks were letting traders influence their rate submissions, Mr Wheatley has called for the FSA to regulate the rate-setting process and making Libor manipulation a crime prosecuted by the FSA.
Banks will have to demonstrate to the regulator how they arrived at their estimates and the FSA will approve the individual responsible for the submissions at each bank.
The reforms also call for more banks to submit Libor estimates to minimise the influence of individual institutions.
Libor panels generally have 20 banks or fewer, compared with 40 for Euribor, which is set in Brussels.
Mr Wheatley said regulators would consider forcing banks that are active in interest rate derivatives and interbank lending markets to participate.
Banks that do take part would be allowed more privacy – their individual submissions, which are closely watched as a sign of financial health would be kept confidential for three months.
The British government plans to incorporate Mr Wheatley’s recommendations into the financial reform bill that is moving through parliament.
Greg Clark, financial secretary to the treasury, said: “Today’s independent report is very clear – the self-regulation of Libor has failed.” – Copyright The Financial Times Limited 2012
