Oversight of Libor will be handed to the U.K.'s financialregulator, and dozens of the currencies and maturities that make upthe benchmark axed, under proposals designed to revive confidencein a rate tarnished by scandal.

The British Bankers' Association should be stripped of theresponsibility for managing the rate and other organizationsinvited to replace it, Financial Services Authority ManagingDirector Martin Wheatley said in London today. More than 100 Liborrates tied to currencies and maturities where there isn't enoughtrading data to set them properly should be scrapped, and a code ofconduct introduced for how lenders contribute to the benchmarkbacked by criminal penalties, he added.

“Governance of Libor has completely failed,” Wheatley said as heunveiled a report on the future of Libor. “This problem has beenexacerbated by a lack of regulation and a comprehensive mechanismto punish those who manipulate the system.”

Wheatley began his review at the request of Chancellor of theExchequer George Osborne after Barclays Plc, Britain'ssecond-biggest lender, paid a record 290 million-pound ($470million) fine in June for manipulating the London interbank offeredrate, used to set rates for more than $300 trillion ofsecurities.

The FSA should receive greater powers to vet bankers whocontribute to the rate, according to Wheatley, who will become thechief executive officer of the Financial Conduct Authority when theFSA splits into two agencies next year.

He stopped short of advocating scrapping Libor, saying thatwould be too disruptive to borrowers whose existing contractsreference the rate.

“Repealing Libor was just not an option,” said Simon Maughan, abanking analyst at Olivetree Securities Ltd. in London. “He's donethe right thing here,” he said. “Improve it, make it based on realtransaction costs, get rid of some of the currencies, that seemslike a sensible approach.”

Libor is calculated by a poll carried out daily by ThomsonReuters Corp. on behalf of the BBA, a banking industry lobby group,that asks firms to estimate how much it would cost to borrow fromeach other for different periods and in different currencies. Thetop and bottom quartiles of quotes are excluded, and those left areaveraged and published for individual currencies before noon inLondon.

The FSA will encourage more banks to submit quotes as part ofthe revamp, Wheatley said, and could force uncooperative banks tosubmit quotes with its new powers.

Cutting Rates

The number of Libor reference rates should be cut to 20 from 150within a year by phasing out currencies and maturities in whichtrading is thin, Wheatley said. Publication of Libor forAustralian, Canadian and New Zealand dollars, as well as the DanishKroner and Swedish Kronor should be ended, he said.

Four-month, five-month, seven-month, eight-month, 10-month and11-month rates should be axed, while eliminating one week,two-week, two-month and nine-month tenors should also beconsidered, according to the proposals.

Banks will also have to follow a code of conduct governing howthey make their daily submissions. Rate-setters will have to basetheir inputs on a hierarchy of data points, starting with anyactual transactions in the unsecured inter-bank deposit market, hesaid. Where none exist, banks should then consider any borrowingsin other instruments including commercial paper, repurchaseagreements and overnight-index swaps.

Wheatley also proposed banks wait three months before disclosingpublicly their own Libor submissions. To rectify the “reduction inimmediate transparency” he recommended lenders publish a regularbulletin that includes trading volumes.

The “first priority” of Libor's new administrator will be tocreate a code of conduct for rate submitters with specificguidelines that the submissions be corroborated by trade data, hesaid.

“Transactions will need to be recorded and there needs to be arequirement for regular external audit of submitting firms,”Wheatley said.

The tender process to take responsibility for setting Libor willstart next week and be run by an independent committee led by SarahHogg, the chairwoman of the Financial Reporting Council. Wheatleysaid the bidding should take about three months.

The BBA's role as guardian of Libor has been under pressuresince the Bank for International Settlements first raised concernin 2008 that the benchmark was being manipulated.

Trade Association

The new manager of the Libor rate should be “an “organizationthat won't be conflicted, like a trade association would be,”Wheatley said.

At least a dozen banks are being probed by regulators worldwideover allegations they colluded to manipulate the benchmark toprofit from bets on derivatives.

“Many respondents thought that the current position of the BBAis untenable due to its loss of credibility from past involvementin Libor and its vested interest in defending the banks,” thereport said. “The BBA acts as the lobby organisation for the samesubmitting banks that they nominally oversee, creating a conflictof interest that precludes strong and credible governance.”

“With Libor being such an intrinsic part of the financialsystem, restoring trust in it is an important step towards thebroader task of rebuilding confidence in banking,” Matthew Fell,director for competitive markets at the Confederation of BritishIndustry, said in an e-mail. “Bringing Libor under an independentregulator will take away the notion that this was a system run bybanks for the benefit of banks.”

Other benchmarks, such as for the prices of agriculturalproducts, oil and precious metals, and in the equity, bond andmoney markets, should be looked at as well, Wheatley said.

The European Union, which is conducting its own review ofinterest-rate benchmarks, including Euribor, said that any solutionmust apply across a wide range of markets.

“Concerns about benchmarks are not limited to interest ratebenchmarks, but extend to all kinds of benchmarks, includingcommodity and benchmarks for other markets,” the EU said in astatement.

Dan Doctoroff, CEO of Bloomberg LP, has proposed an alternativeto Libor dubbed the Bloomberg Interbank Offered Rate, or Blibor. Itwould use data from a variety of financial transactions to betterreflect participating banks' real cost of credit. Bloomberg LP isthe parent of Bloomberg News.

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