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Wheatley Review on Libor

Posted on Aug 09, 2012 by  | 0 Comments

The FSA has announced today that the current system of setting interbank lending rates is no longer fit for purpose and needs to be reformed.

The Scotsman reported that this initial review by the FSA is the first step to reforming Libor after the rate-rigging scandal.

Martin Wheatley, managing director of the FSA, outlined a number of proposals to overhaul the way the rate is set, which suggests regulators should be given more powers to prosecute traders. Other proposals include using more hard data to set the rate and introducing a standard procedure to corroborate submissions, while alternative benchmarks should be considered for setting key rates that affect important financial transactions.

Wheatley’s review was ordered after Barclays was fined £290 million by regulators in the UK and US for manipulating Libor, a key benchmark that is used to set the rates for credit cards, mortgages and savings products.

Until now, membership of the Libor rate-setting panel has been the preserve of a small group of banks, which volunteer daily estimates for the rates at which they would borrow different currencies for different periods, but the review will examine whether actual trading data can be used to set the reference rate.

The Telegraph reported today that according to Mr Wheatley the British Bankers' Association’s role in overseeing the setting of Libor is likely to be changed. Mr Wheatley said: “I am not confident that the BBA’s historic role has been good - frankly it hasn’t.” Nevertheless he added that it was “still an open question” over whether the BBA would be involved going forward.

Mr Wheatley said his proposals would focus on three areas: how Libor rates are compiled; the governance around who sets them; and the regulation of any new system. He said the key aim was to restore trust. “Aside from the ongoing investigations, it’s clear that trust in a vital part of the financial system has been lost, and I believe timely action is needed to regain it,” he said.

The industry will have until 7th September to respond to Wheatley’s review, with final recommendations to be made by the end of next month.

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