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London Inter-Bank Offer Rate, or LIBOR, is to remain the benchmark to be used in transacting business amongst financial institutions, incumbent Managing Director of the Financial Service Authority, Martin Wheatley, recommended. This followed an independent review of the tainted benchmark commissioned in response to the recent rate-rigging scandal that has instigated a series of investigations of the largest banks across the globe.
In the 84-page report, The Wheatley Review, Mr. Wheatley said there is no need to replace LIBOR, even as its credibility has been “severely damaged”.
“There is a clear case in favour of comprehensively reforming LIBOR, rather than replacing the benchmark,” he said.
“The Wheatley Review has concluded that the issues identified with LIBOR, while serious, can be rectified through a comprehensive and far-reaching programme of reform.”
Mr. Wheatley’s conclusion was based on consultations with over 60 individuals and organisations, as well as written responses from stakeholders whose interests intertwine in the £300 trillion worth of financial transactions that use LIBOR as their basis.
A New Watchdog
Keeping LIBOR, however, will not mean the British Bankers’ Association will continue to conduct the rate setting all by itself.
In the comprehensive ten-point proposal submitted by Mr. Wheatley to overhaul the benchmark, an administrator – an independent oversight body – will be the centre point in setting the LIBOR, rather than letting banks deal amongst themselves, and will be based on transaction data, rather than the “expert judgement” of persons-in-charge.
At the height of the scandal back in June 2012, emails and notes between submitters and traders at Barclays (LSE:BARC) revealed rate manipulation, resulting in the bank paying a total of £290 million in fines to the UK Financial Services Authority and the United States’ Commodity Futures and Trading Commission and the Department of Justice.
While the report did not zoom in to Barclays meddling of the LIBOR, Mr. Wheatley’s recommendations made a good case out of the bank’s misconduct, attacking the system itself to be part of the problem.
Mr. Wheatley, in a speech at an event today, acknowledged that LIBOR was “a creation of the market, invented by the market for the market” but said that the system needed a form of regulation by the government.
A Financial Conduct Authority, in which Mr. Wheatley will become the first Chief Executive, is to be established soon with the mandate to securing integrity in the financial services.
“Today we press the reset button,” Mr. Wheatley said.
