Wheatley Review sets out Libor reform recommendations

Wholesale reform of Libor is needed in order to restore the credibility of the international benchmark, FSA managing director Martin Wheatley said today.

Releasing his report on the future of the London inter-bank offered rate, Wheatley dismissed the possibility of entirely replacing the benchmark and instead set out a ten-point plan for reform.

This includes the introduction of a new regulatory structure for Libor and allowing the FSA to take action against those who break the rules. Wheatley also called for a fundamental overhaul of the way Libor is run, including taking responsibility away from the British Bankers’ Association (BBA), the banking organisation that currently oversees the rate.

In his speech today, Wheatley criticised the BBA for being careless in policing Libor and for putting too much trust in a system that lacked “the right level of checks and balances”.

The BBA acknowledged yesterday that the review was an “essential step” in reforming the system and indicated that it would support any recommendation that responsibility for Libor should be passed to a new administrator.

Other recommendations of the Wheatley Review include improving some of the data on which the inter-bank rate is based, requiring banks to back up their submissions with evidence of relevant transactions, and also encouraging more institutions to submit rates to Libor in order to make it more representative and harder to manipulate.

Wheatley described Libor as a broken system but stressed that it is not beyond repair. He said that reform is essential to help restore the trust that has been lost, and it is up to regulators and market participants to work together towards a lasting and sustainable solution.

The independent review on the regulation of Libor was set up by the UK government in July, after Barclays was fined GBP290m by UK and US regulators because its traders had attempted to manipulate the key global interest rate.

(USD1=GBP0.62)