Britain’s independent review of the London interbank offered rate (LIBOR) Friday published a discussion paper to kick off its inquiry into how to reform the troubled system.

The review, which has been commissioned by the UK Treasury and is headed by Martin Wheatley, managing director of the UK’s Financial Services Authority (FSA) and future head of its new conduct regulator, sets out initial proposals for reforming the current framework for setting and governing LIBOR.

The paper concludes that, given the recent revelations of problems with the current LIBOR regime, maintaining the status quo is not an option; LIBOR has to be reformed, and possibly replaced with other benchmarks in some markets. It cites a number of significant weaknesses that have eroded LIBOR’s credibility as a benchmark, including that: it relies on judgment rather than transaction data; banks have incentives to attempt to manipulate the rate, either to signal their creditworthiness or to support trading positions; the existing mechanism leaves opportunity for manipulation; and, there are weaknesses in governance. Stronger oversight, with greater independence and transparency is needed, it says.

“It is already clear that at least some serious misconduct has taken place relating to LIBOR submissions in recent years,” it says. And, so, “Retaining LIBOR unchanged in its current state is not a viable option, given the scale of identified weaknesses and the loss of credibility that it has suffered.”

The paper sets out detailed ideas on how LIBOR could be comprehensively reformed in order to restore confidence in the rate, including: improving the calculation mechanism to make it more robust and transparent; enhancing governance; reforming the regulatory framework to bring the administration of, and submissions to, LIBOR under regulatory scrutiny.

It also suggests that markets will want to consider alternative benchmarks for some of the types of transaction that currently rely on LIBOR. And, it suggests that any decision to turn to alternative benchmarks should be coordinated at an international level.

Also, the paper notes that the issues that have been identified with LIBOR have broader implications for a range of other benchmarks, both within financial markets and beyond. And so, it suggests that it is worth considering whether there is a clear set of principles or characteristics that should be applied to all globally used benchmarks concerning methodology, governance, oversight, and transparency.

“It is clear that regardless of the outcome of ongoing international investigations, trust in a vital part of the financial system has been badly damaged and timely action is needed to repair it. Today, we are taking the first step in this process by launching the Wheatley Review discussion paper, which seeks responses from a wide range of market experts and international stakeholders. This review aims to ensure that LIBOR is reformed in whichever way fully restores credibility and trust,” said Wheatley.

The review is also to consider the scope of the UK authorities’ civil and criminal sanctioning powers with respect to financial misconduct, particularly market abuse; and the FSA’s investigations into market misconduct.

The discussion paper is open for consultation until September 7. The review is to report to the UK’s Cabinet Committee on Banking Reform by the end of the summer so that any necessary legislative changes can be considered for inclusion in its new financial services legislation.

“This review will report by the end of the summer in time for any necessary changes to be taken forward in legislation. The government is also working with its international partners to inform the international work in this area and work towards a globally consistent solution,” added Mark Hoban, financial secretary to the Treasury.