* FSA chief says Libor too embedded in system to be scrapped
* Says longer term, participants should mull alternatives
* To cut number of Libor reference rates to 20 from 150
* UK govt, BoE want changes to come in without delay
By Huw Jones
LONDON, Sept 28 Britain's top financial watchdog
delivered a 10-point plan to overhaul Libor on Friday but
stopped short of scrapping the benchmark interest rate
discredited by a rigging scandal.
The Financial Services Authority's plan marks the first
concrete step by regulators to repair a system of interest rates
that underpins more than $300 trillion of contracts and loans
from U.S. mortgages to Japanese interest-rate swaps.
Faith in the system plummeted after Barclays was fined in
June for rigging Libor. Other banks are under investigation.
"The system is broken and needs a complete overhaul," said
Martin Wheatley, head of the Financial Services Authority (FSA).
But there are no better alternatives now and any transition
to a new benchmark would be difficult because Libor is so deeply
embedded in the financial system, Wheatley said, adding that it
made sense to look at other possible benchmarks long term.
Britain's government sees the reform of Libor as critical to
restoring global confidence in London as a financial centre.
"The longer the situation prevails that trust has been
eroded, the more difficult it is to restore," Britain's
financial services minister Greg Clark told Reuters.
The FSA plan includes oversight by a new panel from 2013.
Until now, Libor rates have been set daily by the British
Bankers Association (BBA) industry body on the basis of
estimates submitted by global banks.
"Bringing Libor under an independent regulator will take
away the notion that this was a system run by banks for the
benefit of banks," said Matthew Fell, director for competitive
markets at the Confederation of British Industry lobby group.
Short sterling futures jumped in London as some in the
market had expected Wheatley's reforms to be tougher, with the
result that Libor rates would be higher than in the past.
CHARGES OF MANIPULATION
Most responses to the plan were supportive, but Stephen
Gilchrist, head of regulatory law at Saunders Law, said
regulation of individuals as proposed by Wheatley had not
stopped abuses in other financial markets.
"The FSA only authorise persons in the financial services
sector who pass a 'fit and proper' test, which goes to probity
and integrity. Where has that got us in the recent past?"
Gilchrist said in an email.
Multiple banks have been accused of trying to manipulate
Libor. Barclays Plc agreed to pay over $450 million to
U.S. and British authorities in June to settle allegations it
tried to move Libor to help its trading positions.
Wheatley's programme for reform includes auditing banks that
contribute data used to calculate the rates. The number of rates
calculated will be cut from 150 to 20, with more banks required
to contribute to the remaining ones.
Libor, which is meant to reflect the rates at which banks
borrow from one another, will also include actual borrowing
transactions. Previously, banks could estimate where they think
they would borrow, which left room for manipulation.
Bank employees making Libor submissions will have to be
approved by the FSA. Wheatley is looking for authorisation to
criminally sanction anyone who attempts to rig the rate.
Reuters parent company Thomson Reuters Corp
collects information from banks and uses it to calculate Libor
rates according to specifications drawn up by the BBA.
Thomson Reuters and Bloomberg LP, which compete in providing
news and data to markets, both said they were working with the
financial industry in response to the Libor review.
David Craig, president of Financial & Risk at Thomson
Reuters, said the company was considering whether to tender for
the new administrator role. Dan Doctoroff, President and CEO of
Bloomberg said it was consulting on developing an index to meet
the needs raised by Wheatley.
A major remaining problem is that in financial crises, such
as the one in 2008, banks cease lending to one another,
effectively removing data needed to calculate Libor.
Mervyn King, governor of the Bank of England, said: "Over
the medium to long term, further thinking will be needed to meet
the challenge of benchmarks based on thinly traded markets,
especially when they are quote-based."
The reforms come amid more crackdowns on the banks that
submitted rates used to calculate Libor. Royal Bank of Scotland
is expected to be next to settle Libor charges.
Britain's government commissioned Wheatley to report on
reforming Libor and is expected to back the findings in full.
Legislative changes will be inserted into a financial services
bill now being approved by parliament.