Regulator calls for fast review of Libor
Source: Agencies |
August 11, 2012, Saturday
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Print Edition
Print Edition
BRITAIN'S financial regulator yesterday launched a quick review of the London interbank offered rate, the interest rate index that has been subject of a global scandal, raising questions on how it is regulated and calculated.
Martin Wheatley, managing director of the Financial Services Authority, said he was calling for industry responses by September 7 so that proposals can be included in legislation now pending in Parliament.
"The way the use of Libor has evolved, as well as the findings from the investigations into its manipulation, highlight that the existing structure and governance of Libor is no longer fit for purpose and reform is needed," Wheatley said.
Libor, which has come under scrutiny since Barclays bank admitted manipulating rates, is not calculated by actual borrowing costs. It's a self-policing system, whereby banks make a judgment of the rate at which they could borrow from other banks.
Wheatley said using actual rates would overcome the problem of subjectivity, but that there would still be difficulties of setting rates in 10 currencies and 15 maturity dates when borrowing volumes are low. The solution, he said, might be to mix other transactions into the calculations.
Libor sets benchmarks for hundreds of trillions of dollars of contracts globally, including mortgages and commercial loans.
"So it's vital that people trust it, as so many things, from complex trading in the City through to a person's mortgage and pension, depend on it," Wheatley said.
Wheatley also said stronger powers to prosecute those who bend Libor rules are also under consideration.
Martin Wheatley, managing director of the Financial Services Authority, said he was calling for industry responses by September 7 so that proposals can be included in legislation now pending in Parliament.
"The way the use of Libor has evolved, as well as the findings from the investigations into its manipulation, highlight that the existing structure and governance of Libor is no longer fit for purpose and reform is needed," Wheatley said.
Libor, which has come under scrutiny since Barclays bank admitted manipulating rates, is not calculated by actual borrowing costs. It's a self-policing system, whereby banks make a judgment of the rate at which they could borrow from other banks.
Wheatley said using actual rates would overcome the problem of subjectivity, but that there would still be difficulties of setting rates in 10 currencies and 15 maturity dates when borrowing volumes are low. The solution, he said, might be to mix other transactions into the calculations.
Libor sets benchmarks for hundreds of trillions of dollars of contracts globally, including mortgages and commercial loans.
"So it's vital that people trust it, as so many things, from complex trading in the City through to a person's mortgage and pension, depend on it," Wheatley said.
Wheatley also said stronger powers to prosecute those who bend Libor rules are also under consideration.
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