Government regulation of a cornerstone of financial markets has moved closer after a British banking body agreed to surrender its decades-long role in overseeing Libor, the scandal-riven global benchmark for borrowing costs.
The British Bankers' Association formally voted to cede its role last week, more than four years after questions were first raised about whether banks were lying in their submissions to the setting that governs $350tn in contracts worldwide.
The move came at the request of UK officials who plan to announce a new regulatory structure for the rate-setting process as part of a package of reforms due to be announced on Friday, two people familiar with the process said. The rates serve as benchmarks for everything from US home mortgages to complex derivatives transactions worth billions of dollars.
Martin Wheatley, managing director of the Financial Services Authority, has been leading a review of the rates aimed at restoring confidence after Barclays paid £290m to settle allegations that it had tried to manipulate Libor and Euribor, a similar interbank rate set in Brussels.
More than a dozen other banks and financial institutions are being probed on three continents for similar manipulation allegations. UBS has said it has received partial immunity for working with investigators, and Royal Bank of Scotland has said it expects to reach a settlement eventually.
The BBA has been gradually backing away from the rate-setting process since 2008, when some analysts first complained that banks were understating their Libor submissions.
The BBA said in a statement: “The BBA seeks to work with the Wheatley review team as they complete their consultation on the future of Libor. If Mr Wheatley’s recommendations include a change of responsibility for Libor, the BBA will support that.” It declined to comment further.
Under the current set-up, Libor rates are set daily in 10 currencies and 15 time periods by asking panels of banks to estimate the cost at which they think they can borrow. The top and bottom are thrown out and the rest of the submissions are averaged. The BBA serves as a sponsor and ThomsonReuters performs the actual calculations. Both Bloomberg and NYSE Euronext have volunteered in submissions to the Wheatley review to take over administration of Libor.
The European Banking Federation so far has no plans to step back from Euribor, the rate it sponsors. Unlike the BBA which is made up of individual banks, EBF draws members from national banking associations.
“There is no comparison with the Libor case,” an EBF spokesman said. “Our stakeholders are national associations and not the banks themselves, this prevents any potential conflict of interest in hosting the governance of benchmarks.”
Neither the FSA nor the BBA would say how Libor will be set and sponsored in the future, but it is clear that regulators will take a much more active role. Gary Gensler, chairman of the US Commodity Futures Trading Commission, which has led the Libor probe, said this week that the rates needed to be reformed or replaced very quickly.
The Association of Corporate Treasurers, which represents corporate Libor users, said the BBA’s decision to let go of the rates it helped create “makes sense”.
“Given the situation we have got ourselves into, a bigger regulatory role would be good. It is a huge bench mark but the entire set up is entirely voluntary,” said Martin O’Donovan, ACT deputy policy director.
Additional reporting by Philip Stafford