LIBOR supervision will be taken from the British Bankers’ Association (BBA), the lobby group that has been responsible for its oversight, and given instead to the Financial Services Authority (FSA), Britain’s financial regulator. In addition, more than 100 LIBOR rates bound to maturities and currencies that lack sufficient trading data to allow for proper determination will be done away with, according to FSA Managing Director Martin Wheatley.
Bloomberg reported Friday that Wheatley also said lenders contributing to the setting of the benchmark rate will be subject to a code of conduct backed up by criminal penalties. The determinations came in a report prepared by Wheatley at the request of George Osborne, chancellor of the Exchequer, and released in London Friday.
“Governance of LIBOR has completely failed,” Wheatley said in the report. “This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.” He did not recommend scrapping the London interbank offered rate altogether, saying that since it is a factor in many existing contracts such a move would be too disruptive to borrowers.
Wheatley, who will become the chief executive officer of the new Financial Conduct Authority next year when the FSA will be divided into two separate agencies, also recommended that the FSA be given greater powers to vet bankers who contribute to setting the rate.
Each day, banks estimate their cost of borrowing from one another for different spans of time and in different currencies, and provide those estimates to the BBA to determine LIBOR. The top and bottom quartiles of submitted estimates are discarded and the remaining estimates are averaged to determine the rate for each currency. The rates are published before noon in London each day.