February 25, 2013 5:33 pm

Search begins for new Libor administrator

The UK effort to restore confidence in Libor took another step forward on Monday as the search began for a new administrator for the scandal-plagued rate.

A committee headed by Lady Hogg will select the new administrator, subject to approval by the Financial Conduct Authority, the UK’s new markets regulator.

The members include FCA head Martin Wheatley, Treasury and Bank of England officials and three groups representing Libor users. It will still be compiled daily by averaging submissions from panels of banks.

Libor has been tarnished by a global rate-fixing scandal that has engulfed a dozen institutions on three continents. Barclays, UBS and Royal Bank of Scotland have collectively paid more than £1.6bn in penalties because their traders manipulated the rate to make money on derivatives. Other banks and interdealer brokers are still being investigated.

US and European regulators have called for future Libor submissions to have stronger links with actual market transactions, arguing that the current system in which $300tn of derivatives are priced off bank estimates is too unbalanced.

Last autumn, a review led by Mr Wheatley recommended formal regulation of the rate-setting process as well as taking administrative responsibilities away from the British Bankers' Association, which had sponsored Libor since the 1990s.

The BBA formally voted on Monday to relinquish the administration to whichever business is selected by the Hogg committee. “The absolute priority is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators,” a spokesman said.

UK regulators have said they are happy for the new administrator to be a private company that would explore the commercial viability of Libor. However the new administrator will also be obligated to monitor submissions, publish statistical digests of rate submissions and make periodic reviews on Libor’s market effectiveness and credibility.

Thomson Reuters, the data provider responsible for the administration of Libor for the last 25 years, has said it would like to run the toughened new system after being assured by authorities it was not under investigation. US rival Bloomberg has also expressed an interest, as has NYSE Euronext, the exchanges operator and a growing data company called Rate Validation Services, run by a former London Stock Exchange executive.

Critics have argued that the new administrator may face the same historic problem – that ultimately benchmark rates will be set on the information that is provided to them by the banks. However, contenders for the new role are looking at ways to reference the benchmark price. For example, Bloomberg has proposed an index that would incorporate market-based quotes from credit default swaps transactions, corporate bonds and commercial paper while RVS aims to provide global banks with financial benchmarks using evidence and transaction-based data.

Greg Clark, financial secretary to the Treasury, said: “The government is determined to rebuild the reputation of UK financial services. Establishing confidence that the attempted manipulation of Libor can never happen again is crucial.”

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