LIBOR review to consider whether rate setting should be regulated

The UK Chancellor of the Exchequer has spelled out the terms of a planned review of the system for setting the London Interbank Offered Rate (LIBOR), in the wake of an ongoing rate-rigging scandal.

Soon after the settlements with Barclays Bank plc were announced last month, the UK Treasury said that it had commissioned a review of the framework for setting LIBOR by Martin Wheatley, who is to head the new Financial Conduct Authority (FCA) and is currently managing director of the Financial Services Authority (FSA).

On Monday, the Treasury said that Wheatley’s review will formulate policy recommendations for reforming the current framework for setting and governing LIBOR, including whether the rate setting should become a regulated activity; whether actual trade data could be used to set the benchmark; the proper governance structure for LIBOR; the potential for alternative rate-setting processes; and the consequences for financial stability of moving to a new regime.

It will also examine the adequacy of sanctions to appropriately tackle LIBOR abuse, including an assessment of the scope of the UK authorities’ civil and criminal sanctioning powers for financial misconduct, particularly market abuse; and FSA’s enforcement regime. It will not look at specific allegations of rate rigging, leaving that to ongoing enforcement and criminal investigations.

Finally, it will look at whether other price-setting mechanisms in financial markets raise similar concerns, and it will provide provisional policy recommendations in this area too.

A discussion paper covering these issues is to be published on August 10, and that will be open for a four week comment period. The review is to report by the end of the summer to allow the British government to consider amendments to new financial services legislation, which is currently being considered by its House of Lords.

“The findings of the FSA — in conjunction with the U.S. CFTC and the Department of Justice – relating to misconduct in respect of LIBOR and EURIBOR submissions are extremely serious in nature. This benchmark rate is used globally for trillions of dollars worth of financial contracts. Therefore, it is clear that urgent reform of the LIBOR compilation process is required,” said Wheatley. “Such reform may include amendments to the technical definitions used for LIBOR, the associated governance framework and the role of official regulation. The review will also consider whether similar measures are required for other existing benchmarks.”

LIBOR is determined by a daily poll carried out on behalf of the British Bankers’ Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies.

EURIBOR is overseen by the European Banking Federation in Brussels. The rates are used to set prices for securities from mortgages to car loans.