Libor gets overhaul, but is not scrapped

Britain's financial regulator will oversee Libor, while dozens of the currencies and maturities that make up the rate will be axed under far-reaching proposals to restore confidence in the scandal-plagued benchmark rate

Ben Moshinsky and Lindsay Fortado

The oversight of Libor, the London interbank offered rate, will be handed to Britain's financial regulator, while dozens of the currencies and maturities that make up the benchmark will be axed under proposals designed to revive confidence in the tarnished benchmark rate.

The British Bankers' Association (BBA) will be stripped of the responsibility for managing the rate and other organisations invited to replace it, Martin Wheatley, the managing director of the Financial Services Authority (FSA), said yesterday. More than 100 Libor rates tied to currencies and maturities where there isn't enough trading data to set them properly should be scrapped and a code of conduct introduced for how lenders contribute to the benchmark backed by criminal penalties, he added.

"Governance of Libor has completely failed," Mr Wheatley said as he unveiled a report on the future of Libor. "This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system."

Mr Wheatley began his review at the request of George Osborne, the Chancellor of the Exchequer, after Barclays, Britain's second-biggest lender, paid a record £290 million (Dh1.7 billion) fine in June for manipulating Libor, which is used to set rates for more than US$300 trillion (Dh1.1 quadrillion) of securities.

The FSA should receive greater powers to vet bankers who contribute to the rate, according to Mr Wheatley, who will become the chief executive officer of the Financial Conduct Authority, when the FSA splits into two agencies next year. He stopped short of advocating scrapping Libor, saying it would be too disruptive.

"Repealing Libor was just not an option," said Simon Maughan, a banking analyst at Olivetree Securities in London.

Libor is calculated by a poll carried out daily by Thomson Reuters Corporation on behalf of the BBA, a banking industry lobby group, that asks firms to estimate how much it would cost to borrow from each other. The top and bottom quartiles of quotes are excluded and those left averaged and published for individual currencies before noon in London.

The number of Libor reference rates should be cut to 20 from 150 within a year by phasing out currencies and maturities in which trading is thin, Mr Wheatley said.

Banks will also have to follow a code of conduct governing how they make their daily submissions. "Transactions will need to be recorded," Mr Wheatley said.

The tender process to take responsibility for setting Libor will start next week and be run by an independent committee led by Sarah Hogg, the chairwoman of the Financial Reporting Council.

The bidding is expected to take about three months.

* Bloomberg News