Britain's top financial regulator plans to implement a sweeping reform of the London interbank offered rate, according to reports Friday. The move may help restore credibility in Libor, the rate at which banks are willing to lend to each other following a rate-fixing scandal that erupted earlier this year and saw Barclays PLC UK pay about $450m to settle allegations of rigging.
Martin Wheatley, head of the U.K. Financial Services Authority, intends to implement a 10-point plan to overhaul Libor, which includes removing control of the rate from the British Bankers Association and removing many versions of the rate so that there are 20 versions of the rate set daily rather than 150.
The report recommends the following changes for Libor process.
- Regulation - The FSA should regulate the submission and administration of Libor as well as approve the key personnel involved in process. The FSA should be allowed to prosecute manipulation or attempted manipulation of the benchmark.
- Institutional reform, part I - Since the British Bankers Association failed to properly oversee the Libor setting process, it should take no further role in the administration of the benchmark and responsibility should be transferred to a new administrator. Wheatley said that an open tender process to find a new organisation to run Libor has already been launched on Friday.
- Institutional reform, part II - This new administrator should keep under surveillance and scrutinise any submissions as part of its governance and oversight of the rate.
- The rules for governing Libor, part I - Submitting banks should immediately comply with the submission guidelines presented in Wheatley’s review.
- The rules for governing Libor, part II - The new administrator needs to introduce a strict code of conduct for submitters and transactions should be recorded. Regular, external audits of submitting firms will be required. Users of Libor will further be subject to new, tough systems and controls.
- Immediate improvements to Libor, part I - As a basis for the review, Wheatley examined transactions volumes and variances across currencies, and concluded that some maturities and currencies were rarely used. The new administrator and the BBA should remove those currencies from Libor, including Australian, Canadian and New Zealand Dollars, as well as Swedish and Danish Krone.
- Immediate improvements to Libor, part II - Publication of submissions should be delayed by at least three months to lower the risk of manipulation.
- Immediate improvements to Libor, part III - Banks that currently do not submit their use of Libor should be encouraged to participate as widely as possible and, if necessary, though new regulations.
- Immediate improvements to Libor, part III - Users should consider if Libor is the most appropriate reference rate for transactions or if there are other benchmarks that are superior.
- International co-ordination - U.K. authorities should work closely with the European and International organisations to discuss alternative reference rates and which role regulators should play in overseeing transactions.