Every two months, representatives from the world's largest banksmeet at an undisclosed location to review the London interbankoffered rate.

Who sits on the British Bankers' Association's Foreign Exchangeand Money Markets Committee, the body that governs the benchmarkfor more than $300 trillion of securities worldwide, is a secret.No minutes are published. The BBA won't identify any members,saying it wants to protect them from being lobbied, and declined tomake the chairman available for interview.

The group's lack of transparency is symptomatic of aself-regulated system that failed to stop traders around the worldmanipulating the world's most widely used benchmark interest ratefor profit. Martin Wheatley, the British regulator charged withreviewing Libor after the scandal, is now weighing whether to bringoversight under the control of regulators.

“Politically something has to fundamentally change in the waythat Libor is run,” said Owen Watkins, a former regulator at theU.K. Financial Services Authority and now a lawyer at Lewis SilkinLLP in London. “The obvious way to change it is to have regulatorsmore involved than they were in the past.”

The group has sole responsibility for all aspects of thefunctioning and development of Libor, according to the BBA. Itsfunctions include the design of the benchmark, which banks sit onthe panels that determine the rate, and scrutiny of all ratessubmitted.

Members are “highly experienced market participants” who areindependent of the BBA “and any other organization,” the websitesays. Still, all committee members act as “individuals representingtheir firms,” the BBA says. The chairman is also drawn from one ofthe banks that submit to the rates.

“Benchmark-setting is a process which affects the public good inthat it brings certainty to markets,” said Greg Ford, a spokesmanfor Finance Watch, a Brussels-based public interest lobby group.“For that reason it needs the highest forms of governance andprotection. Anonymity doesn't fit that at all. How can you controlconflicts of interest when you don't know who you are dealingwith?”

Spokesmen at Credit Suisse Group AG, Royal Bank of ScotlandGroup Plc and UBS AG declined to comment on whether they have anyrepresentatives on the committee, or their identities. BarclaysPlc, Deutsche Bank AG, HSBC Holdings Plc, Bank of America Corp andCitigroup Inc. didn't reply to e-mails seeking information on theirinvolvement in the committee.

Transparency Lacking

“There is an apparent lack of transparency,” Wheatley said in adiscussion paper published Aug. 10. The scrutiny provided by theBBA's Foreign Exchange and Money Markets committee “doesn't appearto be sufficiently open and transparent to provide the necessarydegree of accountability to firms and markets with a directinterest in being assured of the integrity of Libor.”

The benchmark is determined by a daily poll carried out onbehalf of the BBA that asks banks to estimate how much it wouldcost to borrow from each other for different periods and indifferent currencies. At least a dozen firms are being probedworldwide over allegations they manipulated the rate.

Dan Doctoroff, chief executive officer of Bloomberg LP, proposedan alternative to Libor, dubbed the Bloomberg Interbank OfferedRate, in a Wall Street Journal opinion piece this month. BloombergLP is the parent of Bloomberg News.

The committee has so far failed to produce reforms that convinceregulators and to levy sanctions against banks that have admittedto manipulating the rate. After the Bank for InternationalSettlements first raised concern Libor was open to manipulation in2008, the committee stepped up scrutiny of rate submissions.

Bank of England Governor Mervyn King described the response as“wholly inadequate” and ordered any reference to the central bankto be removed from the BBA document explaining the changes,according to correspondence between the bank and the New YorkFederal Reserve released in July.

One power the committee did introduce was to grant itself theright to remove any banks “unquestionably in breach of the Libordefinition or terms of reference,” according to the BBA.

It hasn't exercised that power — even after Barclays Plc wasfined a record 290 million pounds ($453.4 million) on June 27 forrigging the rates over more than four years. Barclays sits on thepanel for rates including U.S. dollar Libor, Sterling Libor andSwiss Franc Libor.

“Libor panels are always kept under review,” BBA spokesman BrianMairs said in an e-mailed statement. “Following the recentregulatory ruling at Barclays, the BBA and others are working toensure the integrity of the benchmark.”

The committee may be reluctant to ban lenders, because thatwould make it hard to construct a workable rate, said FinanceWatch's Ford. The dozen banks still being probed are among thebiggest players in an illiquid interbank market, he said.

In Japan, regulators have suspended banks for lapses in theirrate-submission processes. In December, the Financial ServicesAgency ordered UBS AG to suspend trading for a week in derivativestied to yen Libor and Euroyen Tibor, the Tokyo Interbank OfferedRate for yen held overseas. The following month, Citigroup'sTokyo-based trading unit was banned from dealing in securities tiedto Libor and Tibor, the Tokyo interbank offered rate, for twoweeks.

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