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Britain sets out Libor reform ideas

by Jonathan Braude  |  Published August 10, 2012 at 12:30 PM
LIBOR2012_227x128.gifA British government-commissioned review of Libor and Euribor warned Friday, August 10  that retaining the current system unchanged is "not an option," and proposed far-reaching reforms and stronger sanctions to tackle abuse.

The review, headed by Financial Services Authority managing director Martin Wheatley, follows the revelations that Barclays plc and other international banks manipulated the London Interbank Offered Rate. The scandal prompted an international outcry that led to the downfall of Barclays CEO Bob Diamond and the appointment, announced Thursday night, of David Walker to replace Marcus Agius as the bank's chairman.

Libor is calculated using rates submitted by a group of leading banks that estimate how much it costs them to borrow in 10 currencies and over different periods, ranging from overnight to 12 months.

In a first discussion paper, Wheatley proposed pegging the rate to actual market data, rather than subjective submissions from banks. He also called for formal regulation, instead of leaving it to the informal oversight, as at present, of the toothless and ill-equipped British Bankers Association.

Wheatley, who is also CEO-designate of the future Financial Conduct Authority, said the mechanism for calculating Libor could be "significantly improved." He said the calculation and compilation methodologies must be made more robust and transparent, and argued that a trade-reporting mechanism might be one way to improve the availability of transaction data.

In addition, he called for improved governance, possibly via a code of conduct establishing clear guidelines relating to policies and procedures concerning Libor submissions.

Wheatley said that alternative benchmarks might need to be established, instead of relying solely on Libor for calculating the raft of different financial rates used by international banks.

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Tags: Barclays | Libor | M&A

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