Martin Wheatley, who is leading a review for the U.K. Treasury into how Libor is governed, may recommend that bankers who make submissions to the benchmark should be regulated, said a person with knowledge of the plans.
Employees who submit the estimates that are the basis of the rate would become subject to approval by Britain’s Financial Services Authority, said the person, who asked not to be identified because the talks are private. Wheatley, a managing director at the FSA, is set to unveil his proposals on Sept. 28.
He began the review at the request of Chancellor of the Exchequer George Osborne after Barclays Plc, Britain’s second-biggest lender, paid a record 290 million-pound ($470 million) fine in June for manipulating the London interbank offered rate. The British Bankers’ Association, the London-based lobby group that oversees the rate, yesterday signaled it will give up responsibility for the benchmark following claims traders manipulated the benchmark. Libor is used to set rates for at least $300 trillion of securities.
“There is going to be much more regulatory oversight of Libor in the future,” said Simon Maughan, a banking analyst at Olivetree Securities Ltd. in London. “There will be a new trade body to oversee the rate. You will also see a marked reduction in the number of rates set from the 12 different time periods currently required, as some of them are so illiquid.”
Libor is calculated by a poll carried out daily on behalf of the BBA that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies before noon in London.
The BBA’s role as guardian of Libor has been under pressure since the Bank for International Settlements first raised concern in 2008 that the benchmark was being manipulated. At least a dozen banks are being probed by regulators worldwide over allegations they colluded to manipulate the benchmark to profit from bets on derivatives.
“The existing mechanisms for Libor have fallen into disrepute and are no longer viable,” said Kevin Burrowes, U.K. financial services leader at PricewaterhouseCoopers LLP in London. “The new Libor mechanism will need to be robust, afford greater levels of consumer protection than was the case previously, and subject to greater oversight and scrutiny.”
The BBA started an internal review of the benchmark last year as banks started to disclosing that they were being probed by regulators over rate-rigging. As recently as June, that panel was set to resist calls to overhaul the rate by basing it on actual transactions and instead favored a beefed-up code of conduct and increased oversight, three people briefed on the talks said at the time.
In its submission to the Wheatley-led review, the BBA recommended that Libor be based on actual trades rather than guesswork and that it should publish rates for fewer currencies, Sky News reported today.
Wheatley said last month that material changes to the way Libor is calculated and published risks invalidating millions of financial contracts, covering products ranging from mortgages to derivatives.
“Any migration to new benchmarks would require a carefully planned and managed transition in order to limit disruption to the huge volume of outstanding contracts that reference Libor,” Wheatley said in August following a speech at Bloomberg LP’s office in London.
Dan Doctoroff, chief executive officer of Bloomberg LP, has proposed an alternative to Libor dubbed the Bloomberg Interbank Offered Rate, or Blibor. It would use data from a variety of financial transactions to better reflect participating banks’ real cost of credit. Bloomberg LP is the parent of Bloomberg News.