Every two months, representatives from the world's largest banks meet at an undisclosed location to review the London interbank offered rate.

Who sits on the British Bankers' Association's Foreign Exchange and Money Markets Committee, the body that governs the benchmark for 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 to make the chairman available for interview.

The group's lack of transparency is symptomatic of a self-regulated system that failed to stop traders around the world manipulating the world's most widely used benchmark interest rate for profit. Martin Wheatley, the British regulator charged with reviewing Libor after the scandal, is now weighing whether to bring oversight under the control of regulators.

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

The group has sole responsibility for all aspects of the functioning and development of Libor, according to the BBA. Its functions include the design of the benchmark, which banks sit on the panels that determine the rate, and scrutiny of all rates submitted.

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

“Benchmark-setting is a process which affects the public good in that it brings certainty to markets,” said Greg Ford, a spokesman for Finance Watch, a Brussels-based public interest lobby group. “For that reason it needs the highest forms of governance and protection. Anonymity doesn't fit that at all. How can you control conflicts of interest when you don't know who you are dealing with?”

Spokesmen at Credit Suisse Group AG, Royal Bank of Scotland Group Plc and UBS AG declined to comment on whether they have any representatives on the committee, or their identities. Barclays Plc, Deutsche Bank AG, HSBC Holdings Plc, Bank of America Corp and Citigroup Inc. didn't reply to e-mails seeking information on their involvement in the committee.

Transparency Lacking

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

The benchmark is determined by a daily poll carried out on behalf of the BBA that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. At least a dozen firms are being probed worldwide over allegations they manipulated the rate.

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

The committee has so far failed to produce reforms that convince regulators and to levy sanctions against banks that have admitted to manipulating the rate. After the Bank for International Settlements first raised concern Libor was open to manipulation in 2008, 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 bank to be removed from the BBA document explaining the changes, according to correspondence between the bank and the New York Federal Reserve released in July.

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

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

“Libor panels are always kept under review,” BBA spokesman Brian Mairs said in an e-mailed statement. “Following the recent regulatory ruling at Barclays, the BBA and others are working to ensure the integrity of the benchmark.”

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

In Japan, regulators have suspended banks for lapses in their rate-submission processes. In December, the Financial Services Agency ordered UBS AG to suspend trading for a week in derivatives tied to yen Libor and Euroyen Tibor, the Tokyo Interbank Offered Rate for yen held overseas. The following month, Citigroup's Tokyo-based trading unit was banned from dealing in securities tied to Libor and Tibor, the Tokyo interbank offered rate, for two weeks.

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Libor Committee Clings to Anonymity

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