Central Bankers Set up LIBOR Investigatory Body as UK-led Consultation on Reform Ends

The world’s top central bankers, acting under the co-ordination of the Financial Stability Board (FSB), have agreed to set up a joint body to look into how the London Interbank Offered Rate (LIBOR), which sets the base rate for business and consumer loans around the world, is run. The announcement follows on from the ending of the review into the LIBOR rate-rigging scandal led by Martin Wheatley, chief executive officer (CEO) designate of the UK Financial Conduct Authority (FCA) replacement regulatory body, which closed its doors last week to any further consultations. It is expected to report its findings by the end of September.

Mervyn King, governor of the Bank of England (BoE), commented on the planned new body after a meeting with other central bankers at the Bank of International Settlements (BIS) in Basel, Switzerland, this weekend, saying that: “The BIS governors look forward with great interest to the recommendations of the [UK] Wheatley LIBOR Review, and to the reports of other official groups examining reference rates used in financial markets.

“The BIS governors have agreed to set up a group of senior officials to take forward [the] examination of these issues, and to consult with the market in order to provide input into the wider official debate co-ordinated by the FSB,” added King.

The UK-led Wheatley Review has investigated:  

  • The role the LIBOR benchmark plays in the financial markets.  
  • The flaws in its current structure and oversight, as unveiled when Barclays  was fined US$452.5m and had to appoint a new CEO.  
  • The range of options available for future reform, including the ultimate transition to an official regulatory body. 

Up until now the ad hoc LIBOR system operated under the auspices of the British Bankers’ Association (BBA) which somewhat reluctantly oversaw the collation of all the banks’ rates, using Thomson Reuters technology. The same technology was then used to disseminate the information under licence. The rate is calculated each day by Thomson Reuters, to whom major banks submit their cost of borrowing unsecured funds for 15 periods of time in 10 currencies. A trimmed average of the collected figures is then taken to create ‘bbalibor’. This is a role that the BBA has made clear it no longer feels comfortable with, and the trade organisation thinks an oversight role is only really suitable for an official regulatory body in future.

Almost 20 global banks, in addition to Barclays, are currently under investigation by global regulators in the US, Europe and Asia, for suspected rigging of LIBOR, which is used to price trillions of dollars’ worth of financial derivatives and other products commonly used by corporate treasurers. The scandal of its manipulation has likely cost treasuries billions of dollars in lost or overcharged interest rates. A number of possible legal compensation challenges are now being explored in America, alongside assorted global regulatory responses, with the UK Wheatley Review set to be the first to report.

Industry Reaction

In its response to the Wheatley Review consultation, the Investment Management Association (IMA), a trade body representing the UK’s asset management sector, advocated correcting the current deficiencies with LIBOR, rather than replacing it with a completely new benchmark. “Market confidence in such a vital benchmark requires any reform to take place without delay,” added the IMA in its reaction to the end of the official consultation period on 7 September.

According to the IMA, a reformed LIBOR should give the [chosen] regulator a central role and create a more robust and transparent governance structure. However, the suggested changes to long-standing criminal offences need to be carefully reviewed for unintended impacts, added the trade body, no doubt fearful that making LIBOR manipulation a criminal offence would have meant some its members going to jail during the present scandal.

Commenting on the LIBOR furore, Guy Sears, director of wholesale at the IMA, said: “The LIBOR scandal has caused significant reputational damage to London [as an international market], so it is imperative that reform is swift, well-thought through and robust. However, we do not support a rush to alterations to criminal offences without more work on potential impacts. Current powers, including fines and the ability to ban individuals from working in the industry, should be significant deterrents in the short term.”

Wheatley Review 

The Wheatley Review invited responses to 16 specific questions covering the present operation of LIBOR and what to do about reforming it, with each trade body and other industry representatives concentrating on their relevant constituencies. The International Capital Markets Association (ICMA), for instance, says that it “only focused on those few points of most direct relevance to the international capital market”, stressing that any reform should not disrupt the market and that it is for the market to choose, as a commercial matter, which reference rates to use for new transactions. It also added that “any market abuse should be covered by appropriate market abuse regulation.”

ICMA also highlighted the existence of other official initiatives concerning the overall LIBOR issue in its response to Wheatley, including the work of the European Commission (EC) and the aforementioned central banking community, with the BoE governor seemingly to the fore. “Inevitably there are elements of overlap amongst these initiatives and there is a risk that the proposals which emerge may not necessarily all fit neatly together,” said ICMA in its submission. “Since the implications of any combination of actual proposed changes may differ (for a variety of reasons, including that outstanding LIBOR based contracts are governed by a variety of different laws), and cannot be assessed in advance of an actual change proposal, ICMA respectfully requests that every effort be made to sustain on-going dialogues – both between the requisite officials and with the markets. It is in everyone’s best interests that the issues are adequately addressed, whilst at the same time avoiding any unnecessary adverse implications for the international capital market.”

A call for on-going dialogue is all well and good but corporate treasurers are angry about the LIBOR scandal and while it is true that nobody wants a rushed and unworkable reform solution to be implemented, it is a fact that reform is needed and the sooner it arrives, the better. The full Wheatley Review report, due at the end of this month, will be the first step in this reform programme but as the BoE’s King and BIS has made plan with the establishment of its own group, London will not be left alone to regulate these matters for itself and others anymore. The world is watching this time and if London is going to save its battered reputation as a world centre for finance and trade then it had better come up with a good plan.

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