The U.K. bankers and regulators charged with reviewing Libor in the wake of regulatory probes are resisting calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.
The group, established by the British Bankers’ Association in March after probes into allegations that traders rigged the London interbank offered rate, may propose a code of conduct for banks and impose greater scrutiny of Libor’s correlation with other financial data over time, according to three people with knowledge of the discussions who asked not to be identified because the talks are private. It won’t propose structural changes such as basing the rate on actual trades or taking away oversight of the benchmark from the BBA, the people said.
The BBA, which has overseen Libor for 26 years, is under pressure to restore credibility to the rate after regulators from Canada to Japan began probing whether traders colluded to influence the rate to profit from bets on derivatives.
“Despite its importance, susceptibility to influence, and the allegations of manipulation, Libor remains essentially unregulated,” Andrew Varstein, a lecturer at Yale Law School, and Gabriel Rauterberg, an attorney at New York law firm Cooley LLP, said in a paper published in April. “The effects of index manipulation could be vast.”
Those changes failed to stem suggestions that the rate was vulnerable to abuse. At least nine regulators in the U.S. Canada, Europe and Asia are looking into whether traders colluded to rig Libor.