UK: What Next For LIBOR? The Wheatley Review Reports

Last Updated: 9 October 2012
Article by Rosali Pretorius, Jim Baird, Emma Radmore and Andrew Barber

The Review chaired by Martin Wheatley, looking into regulatory reforms that should result from the recent LIBOR problems, published its final report  on 28 September.

The hard-hitting Review concludes that LIBOR is broken, but not beyond repair, and sets out a 10- point plan for its rehabilitation.

Aims of the Wheatley 10-point plan

The plan aims to provide:

  • new and robust regulation;
  • a fundamental overhaul of the way LIBOR is run;
  • a requirement for banks to provide evidence of relevant transactions; and
  • detailed technical changes to make it much harder to manipulate LIBOR.

Conclusions of the Review

The Review reached three fundamental conclusions:

  • There is a clear case for a comprehensive reform of LIBOR rather than replacing the benchmark. Replacing it would cause significant disruption to financial markets and should happen only if the benchmark were severely damaged and transition to a new, suitable replacement could be managed to ensure limited disruption to the markets.
  • There should be a strict and detailed process for verifying submissions against transaction data. Publication of LIBOR should be limited to those currencies and tenors that have sufficient data to support them.
  • Market participants should continue to play a significant role in LIBOR production and oversight. The authorities' role is to ensure the integrity of the process.

The 10 Points

The 10-point plan covers:

  • Statutory regulation of administration of, and submission to, LIBOR. Specifically, administering LIBOR and submitting to LIBOR will become regulated activities under the Financial Services and Markets Act 2000 (FSMA). Controlled Functions will apply to each new activity. Also, the Treasury should amend s397 FSMA to allow the Financial Services Authority (FSA) to prosecute manipulation or attempted manipulation of LIBOR and support the EU initiatives on market abuse.
  • Removing responsibility for LIBOR administration from the British Bankers' Association (BBA), and passing it to a new administrator. The new administrator should be appointed following a tender process run by an independent committee. FSA will provide a strong degree of external governance.
  • Giving the administrator specific obligations in respect of transparency and fair access to the benchmark. The administrator will take responsibility for surveillance and scrutiny of submissions, production of submission digests and periodic reviews of whether LIBOR continues to meet market needs.
  • Requiring participating banks to comply immediately with the Review's submission guidelines and to back up submissions with clear transaction data.
  • A new code of conduct for submitters which sets out systems and controls expectations, guidelines for use of transaction data and record keeping, and a requirement for regular external audit of submitters. Although the Review found it is appropriate for the LIBOR process to continue to be industry-led, FSA should consider endorsing the code as industry guidance. The Review also recommends the Institute of Chartered Accountants in England and Wales (ICAEW) works with the new LIBOR administrator to ensure ICAEW's proposed guidance on external audit is consistent with the new code.
  • Stopping compilation and publication of LIBOR for currencies and tenors for which there is not enough data to corroborate submissions. Specifically, publication of all LIBORs for five currencies, including Australian, Canadian and New Zealand Dollars should stop, and publication of LIBOR for all currencies for four, five, seven, eight, nine and 11 month tenors should stop. This should happen as soon as possible.
  • BBA should publish individual LIBOR submissions after three months rather than daily. This should reduce potential for manipulation and minimise the possibility of submissions being used as an interpretation of creditworthiness.
  • All banks should be encouraged to participate as widely as possible in the LIBOR compilation process. If necessary new regulatory powers of compulsion should be introduced, but at the moment the Review does not see a need for FSA to compel particular banks to be members of LIBOR panels.
  • Market participants using LIBOR should evaluate their reasons for using it, including whether their contracts cater for the possibility of LIBOR not being produced.
  • Regulators should co-ordinate internationally to work towards promoting clear principles for effective global benchmarks. Regulators should explore the extent to which LIBOR still fulfils its original intended purpose, and whether in some cases alternative investment rates may be more suitable.

Timetable for change

Change should happen as soon as possible. The Government has previously said any necessary regulatory changes can be incorporated in the Financial Services Bill (currently in the House of Lords). But there are also key roles for the BBA, the banks and the conduct of business unit of the FSA (which will carry through to the Financial Conduct Authority). Martin Wheatley says he will work closely with the Treasury, the Bank of England and international regulators on the global debate on benchmarks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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