Britain’s Top Financial Regulator Suggest Complete Libor Overhaul

on Sep 28, 2012
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Martin Wheatley, the managing director of the Financial Services Authority (FSA), has taken it upon himself to fix the London Interbank Offered Rate (Libor) after the recent revelations that banks rigged the interest rate for their own profit over an extended period of.

“Today we press the reset button,” plans to say Mr Wheatley in a speech in the City. “Libor needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do.”
Britain’s top financial regulators said for the Financial Times that it won’t be possible to simply scratch the Libor and move to a different rate. Instead, the interest rate will have to go through a “radical pruning” in order to regain credibility and integrity.

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!m[](/uploads/story/482/thumbs/pic1_inline.png)As reported by the FT, Mr Wheatley has drafted a 10-point plan which includes the removal of five currencies and 130 of the 150 daily fixing and would allow the rate-setting banks to concentrate on the currencies and rates most used by borrowers and investors. The banks submitting their interbank rates will have to demonstrate to the FSA how they arrived at their estimates and the regulator will approve one person for each bank to be held responsible for the submissions. To minimise the influence of individual institutions, Mr Wheatley suggests including more than the current 20 banks in the Libor setting process. The FSA might have to force banks that are active in the interbank lending market and interest rate derivatives to join in.

Last week the British Bank Association took the high path and agreed on surrendering its decade-long role in overseeing the Libor: “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.” The new role will be assigned to a regulated and fully dependent administrator found through a selection process led by Lady Hogg, the head of Britain’s Financial Reporting Council.

The Libor is essential for the world’s financial system and is used as a reference rate for financial derivatives and loans worth more than $300 trillion (£186 trillion). Several ongoing probes are investigating banks that participated in the manipulation of the rate for their own profit-driven reasons. Barclays has been the first to be hit with a £290 million fine over its Libor fixing activity.

The Telegraph reported of recently uncovered internal messages that show how senior traders at the Royal Bank of Scotland (RBS) boasted about operating a “cartel” and making “amazing” amounts of money by rigging the world’s benchmark borrowing rate. The messages suggest that senior executives at RBS were not only aware of the practice but also condoned it. The evidence in question was brought to light by Tan Chi Min, a former trader at RBS’s global banking and markets division in Singapore, who was sacked for “gross misconduct” and decided to sue the bank as he believes he was made a “scapegoat” for malpractice that was in fact condoned by managers. Mr Tan submitted alleged transcripts between him and other RBS traders and executives.
On 19 August 2007 Mr Tan sent a Deutsche Bank trader the following message: “It’s just amazing how Libor-fixing can make you that much money or lose it if opposite. It is a cartel now in London.” Days later he sent another message to Scott Nygaard, who is the global head of RBS’s London treasury market: “We want high fix in 3s [a reference to three-month interbank lending]. Neil is the one setting the yen Libor in London now and for this week and the next.” Mr Nygaard replied with: “Go Neil, hahahahaha.” Regulators and the general public remains stunned by the apparent audacity of the bankers involved.
The Telegraph quoted John Mann, a Labour MP on the Treasury Select Committee: “The situation at RBS was even worse than Barclays. This is potentially significant criminal activity and there needs to be a full police investigation.”
The Libor overhaul suggestions given by Mr Wheatley will most probably be included into the financial reform bill, which is currently moving through the parliament. There is a general agreement among MPs that stricter rules will need to be enforced as to restore the jolted confidence of the British people in their banks.

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