UK regulator plans major reform of Libor system

Britain’s market regulator today unveiled proposals for sweeping reforms of the much-maligned London Interbank Offered Rate, Libor, but stopped short of recommending a replacement of the rate or basing it entirely on actual submissions by banks.

Martin Wheatley, managing director of the Financial Services Authority, announced the 10-point reform plan to the rate used as a benchmark for the pricing of assets globally running into trillions of pounds following a three-month review. “This is not a London issue. This is a global issue,” said Wheatley.

While the system was “broken” and in need of “a complete overhaul”, the rate was not beyond repair and could be fixed, he said. He warned of the risks to existing contracts and to financial stability that replacing it entirely would pose. However, he called for an international discussion and evaluation of alternatives over the long term.

Actual transaction data would have to be used to support Libor submissions across a fewer number of rates and currencies, rather than the current system under which 150 rates were published daily, based solely on banks estimations across 10 currencies and 15 maturities. However, “some degree of judgment” would still have to be used, he said. “Even in the more liquid markets there is not enough daily data available to have a system in place that is entirely based on market transactions, particularly in times of stress.”

The banks’ submissions will only be published every three months, rather than immediately to avoid giving banks an incentive to submit lower rates.

The FSA will also increase the number of banks submitting data, and step up their scrutiny of these institutions, as well as individuals within the banks submitting the data. The FSA – which will soon be replaced by the new Financial Conduct Authority – will toughen its sanctions regime and be able to bring criminal sanctions.

Responsibility for collating and overseeing Libor, held by the British Bankers Authority since 1986, will be passed to a new administrative body, a tender for which was also launched on Friday.

All the review’s reports are expected to be implemented by the government, which commissioned the report in July, and are likely to be included in current legislation passing through Parliament.

Scandal Unearthed

The scale of the problems with Libor began to unravel over the summer, after US and British authorities fined Barclays Rs 2,500 crore over attempts to manipulate Libor. Investigations continue again many other banks.

Some $350 trillion of derivative contracts and $10 trillion of loans are now indexed to Libor globally, it is estimated.

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