Central bankers set up Libor investigatory body as UK-led consultation on Libor reform ends

10 September 2012

The world’s top central bankers, acting under the auspices of the Financial Stability Board, have agreed to set up a joint body to look into how the Libor rate, 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 designate of the UK Financial Conduct Authority replacement regulatory body, which closed its doors last week to any further consultations and is imminently expected to report its findings.

Mervyn King, governor of the Bank of England, commented on the 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 Financial Stability Board," added King.

The UK-led Libor Wheatley review has investigated the role the 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 chief executive; as well as the range of options available for future reform, including the ultimate transition to an official regulatory body. Up until now the ad hoc system consisted of the British Bankers’ Association (BBA) somewhat reluctantly collating all the banks’ rates, using Thomson Reuters technology, and then disseminating the information. This is a role the BBA has made clear that it no longer wants to play and thinks is only suitable for an official regulatory body.

Almost 20 global banks, in addition to Barclays, are currently under investigation by global regulators in the United States, Europe and Asia, for suspected rigging of the London interbank offered rate (Libor), which is used to price trillions of dollars’ worth of financial derivatives and other products.

Industry reaction
In its response to Wheatley’s consultation on reforming Libor, the Investment Management Association (IMA) 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.”

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