Keeping the current system for setting Libor rates is not a viable option, an independent review said today.
The government-commissioned Wheatley Review of the London Inter-Bank Offered Rate (Libor) was set up after Barclays plc (LSE:BARC) was fined GBP290m by UK and US regulators for trying to manipulate the benchmark interest rate. Other banks are still being investigated about their role in the scandal.
The review is led by Martin Wheatley from the Financial Services Authority (FSA), who said today that the current structure and governance of Libor is “no longer fit for purpose” and must be reformed.
A discussion paper published by Wheatley today sets out an initial analysis on the role that Libor plays in financial markets; the flaws in the current structure of setting Libor, its governance and oversight; and various options for reform, including the issue of transition.
Alternatives proposed in the discussion paper include using more actual market transaction data to set the rate, rather than submissions from banks, and introducing formal regulation of the Libor-setting process.
Stronger sanctions to appropriately tackle tackle abuse of the system are also proposed.
In addition, the paper suggests that alternative benchmarks may be considered for at least some of the types of transaction that currently rely on Libor. It noted, however, that because of the global importance of Libor a decision to migrate towards alternative benchmarks should be coordinated at an international level by relevant bodies. The UK authorities should take a leading role in these reforms, it said.
Given the scale of identified weaknesses and the loss of credibility it has suffered, retaining Libor unchanged in its current state is not a viable option, the paper declared.
Banks and other interested parties have four weeks to respond to the discussion paper and final recommendations are expected to be published by the end of the summer.
