UK blazes the right trail on Libor reform
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By George Hay
LONDON, Sept 28 (Reuters Breakingviews) - Martin Wheatley’s Libor reforms strike the right balance. Given the tidal wave of public anger in June when Barclays (BARC.L) was shown to have attempted to fiddle the critical benchmark interest rate, the UK regulator could have recommended the London Interbank Offered Rate be scrapped entirely. His actual approach – reform rather than revolution – makes more sense.
Wheatley is right to state that Libor’s role underpinning $300 trillion of global financial contracts makes it nigh on impossible to bin right now. But he’s also right that the current system needs a complete overhaul. The fundamental call is whether to stick with the current rate-setting process, using rates that banks say they are borrowing at, or to move to using actual traded data. The latter is preferable as it is less easy to fiddle. But in a market panic there may not be enough data to enable an accurate benchmark.
The report recommends a balance. Banks should keep on submitting rates, but will need to show Libor’s supervisors how these tally with actual market data. To make sure this data is credible, a greater number of banks will report the 20 most-frequently traded maturities and currencies, instead of 150. And to ensure that banks won’t look vulnerable if they submit high rates, the individual submissions made by banks will not be published for three months.
Wheatley is rightly less nuanced on a baffling loophole in the current system that means submitters are not subject to FSA scrutiny. From now on they will be, and the regulator will be able to use criminal powers to deal with attempted manipulation. He has also confirmed that the discredited British Bankers’ Association will no longer oversee the submission process.
Picking a sufficiently credible replacement will be crucial. Libor’s new administrator will need to show much greater independence than the BBA, a bank lobby group, managed. An existing recognised exchange may fit the bill.
Ultimately, Libor’s future will depend on whether market participants still want to use it. Wheatley stresses that other benchmarks may in future be more appropriate. But his proposals provide a decent blueprint over what to do until the market delivers its verdict.
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CONTEXT NEWS
- The system for calculating and overseeing the London Interbank Offered Rate is broken and needs a complete overhaul, according to a UK regulatory report published on Sept. 28.
- The review, undertaken by the Financial Services Authority’s Martin Wheatley, states that the FSA should regulate the submission and administration of Libor. It says that the Financial and Markets Act should be amended to allow the FSA to prosecute attempted manipulation of the process.
- Wheatley confirmed expectations that the British Bankers’ Association would no longer play a role in the administration and governance of Libor. A tender process, chaired by an independent panel, will select a new organization to replace the BBA. The panel will be chaired by Lady Sarah Hogg, chair of the Financial Reporting Council.
- The new administrator will introduce a new code of conduct for banks’ Libor submitters. Submissions will normally have to be corroborated by trade data, and banks will need to state when they are not. Banks’ Libor rates will be overseen by regular external audits.
- Wheatley also said that the number of quoted rates should fall from 150 to 20 to reflect the fact that not all rates have sufficient trading data. The four, five, seven, eight, ten and eleven-month maturities will be phased out, as will Libor rates based on the Australian, New Zealand, Canadian dollars and Swedish and Danish crowns.
- Wheatley and Gary Gensler, chair of the Commodity Futures Trading Commission, will co-chair a task force for the International Organization of Securities Commissions (IOSCO) to try to develop a set of overarching principles for global benchmarks like Libor.
- Wheatley speech, Sept. 28: link.reuters.com/bax82t
- BBA statement, Sept. 25: link.reuters.com/cax82t
- Wheatley review, July 31: link.reuters.com/dax82t
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- For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Robert Cole and Martin Langfield)
((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS LIBOR/WHEATLEY
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