British regulatory authorities are preparing to overhaul Libor, the now discredited interbank lending rate that serves as a benchmark for the pricing of trillions of dollars of assets globally.
The review of the London Interbank Offered Rate will be led Martin Wheatley, the managing director of the Financial Services Authority who will make his recommendations to the government, for inclusion in a financial services bill. He warned that the attempts to manipulate the rate by banks, details and the scale of which have only begun to be apparent in the last couple of months, had cast a shadow over the entire financial services industry.
He added that aside from the reforms to Libor itself, it was necessary to consider alternative benchmarks for at least some transactions that now rely on Libor.
The review will examine whether banks should be required to submit actual figures on the trades they make rather than the notional data as well as an improved governance system. It will also look at the current systems for tackling abuse, including the possible use of criminal sanctions. Thirdly, it will look at other price setting mechanisms used in the market, and whether they would need policy changes too.
The British Bankers Association, currently responsible for collating and overseeing Libor said it was pro-actively cooperating with regulatory authorities, and that the absolute priority of everyone was to ensure the provision of a reliable benchmark.
Some $350 trillion of derivative contracts and $10 trillion of loans are now indexed to Libor globally, it is estimated.