Crime to rig the Libor rate under radical overhaul proposals

Barclays headquarters at Canary Warf

Martin Wheatley aims to ‘press reset button’, closing loopholes that made Barclays scandal possible

LAST UPDATED AT 07:16 ON Fri 28 Sep 2012

MARTIN WHEATLEY, a senior official at Britain’s Financial Services Authority, is set to unveil his recommendations for the overhaul of the scandal-tainted London interbank offered rate, or Libor, removing it from the control of a banking-industry group.

With at least a dozen banks under investigation for rate manipulation, Wheatley will propose reforming the rate system, phasing out some versions of it altogether and giving the FSA power to penalise wrongdoers. Any attempt to rig the rate would be a criminal offence.

The reforms, if implemented, will be the most far-reaching since the Libor system was launched in 1986, says The Wall Street Journal. In June, Barclays paid a record £290 million fine for manipulating the system and its chief executive Bob Diamond was forced out.

“The existing mechanisms for Libor have fallen into disrepute and are no longer viable,” Kevin Burrowes at PricewaterhouseCoopers, told Bloomberg. “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 Financial Times says Wheatley’s 10-point plan to “press the reset button” will attempt to close loopholes that made it vulnerable to manipulation. Wheatley favoured reforming the system over abandoning it altogether. Investors argued that there were not enough interbank lending contracts to support a purely transactional-based rate. Nor, with $300 trillion in contracts lasting up to 65 years already in effect, could the banking system risk inconsistency.

“We looked at all the potential alternatives but none of them are demonstrably superior,” he told the FT.

Instead, control will be removed from the British Bankers’ Association, which created Libor. The new system will have the power to fine, censure and delete from the FSA register of approved bankers, any trader caught manipulating the system. A committee will meet to pick a new, FSA-regulated administrator, more banks will be invited to submit rate bids with the effect of reducing any one submission, and 130 of the 150 rates currently produced will be scrapped.

NYSE Euronext, the exchanges operator, has offered to manage the system, while Bloomberg has offered to develop a data-based index, the Bloomberg Interbank Offered Rate, or Blibor, that would more accurately reflect the cost of interbank borrowing.

Last month, Wheatley said 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”. · 

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