28.09.2012

By Simon Miller

Libor should be reformed and not scrapped according to a review by the chief of financial conduct at the Financial Services Authority Martin Wheatley.

Despite the ongoing scandal over the manipulation of Libor by banks in the UK and abroad, the review said that there was a clear case to “comprehensively” reform the bank lending rate.

With contracts with an outstanding value of at least $300trn (£233trn), the review said that a move to replace Libor “could only be justified by clear evidence that the benchmark is severely damaged, and that a transition to a new, suitable benchmark or benchmarks could be quickly managed to ensure limited disruption to financial markets”.

The Wheatley Review concluded that a transition to a new benchmark or benchmarks would pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference Libor.

As expected, the British Bankers' Association would lose responsibility for Libor which would be transferred to a new authority.

Wheatley commented: “Trust in a vital part of the financial system has been badly damaged. Today’s report sets out my plans for reforming what has become a broken system and to help restore the trust that has been lost. 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.

“I have concluded that Libor can be rehabilitated through a comprehensive and far-reaching programme of reform. Although the current system is broken, it is not beyond repair, and it is up to regulators and market participants to work together towards a lasting and sustainable solution”

Financial secretary to the Treasury, Greg Clark, added: “Today’s independent report is very clear – the self-regulation of Libor has failed. It’s yet another example of the broken regulatory system that this Government is committed to fixing.”


A ten-point plan for comprehensive reform of Libor

Regulation of Libor
1 The authorities should introduce statutory regulation of administration of, and
submission to, Libor, including an Approved Persons regime, to provide the
assurance of credible independent supervision, oversight and enforcement, both
civil and criminal.

Institutional reform
2 The BBA should transfer responsibility for Libor to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing
credible internal governance and oversight. This should be achieved through a
tender process to be run by an independent committee convened by the
regulatory authorities.

3 The new administrator should fulfil specific obligations as part of its governance and oversight of the rate, having due regard to transparency and fair and non-discriminatory access to the benchmark. These obligations will include surveillance and scrutiny of submissions, publication of a statistical digest of rate submissions, and periodic reviews addressing the issue of whether Libor continues to meet market needs effectively and credibly.

The rules governing Libor
4 Submitting banks should immediately look to comply with the submission
guidelines presented in this report, making explicit and clear use of transaction
data to corroborate their submissions.

5 The new administrator should, as a priority, introduce a code of conduct for
submitters that should clearly define:
- guidelines for the explicit use of transaction data to determine submissions;
- systems and controls for submitting firms;
- transaction record keeping responsibilities for submitting banks; and
- a requirement for regular external audit of submitting firms.

Immediate improvements to Libor
6 The BBA and should cease the compilation and publication of Libor for those
currencies and tenors for which there is insufficient trade data to corroborate
submissions, immediately engaging in consultation with users and submitters to
plan and implement a phased removal of these rates.

7 The BBA should publish individual Libor submissions after 3 months to reduce the potential for submitters to attempt manipulation, and to reduce any potential interpretation of submissions as a signal of creditworthiness (see paragraphs.

8 Banks, including those not currently submitting to Libor, should be encouraged to participate as widely as possible in the Libor compilation process, including, if necessary, through new powers of regulatory compulsion.

9 Market participants using Libor should be encouraged to consider and evaluate their use of Libor, including the a consideration of whether Libor is the most appropriate benchmark for the transactions that they undertake, and whether
standard contracts contain adequate contingency provisions covering the event of
Libor not being produced.

International co-ordination
10 The UK authorities should work closely with the European and international
community and contribute fully to the debate on the long-term future of Libor
and other global benchmarks, establishing and promoting clear principles for
effective global benchmarks.

The Wheatley Report can be downloaded here.