September 28, 2012 / By David ENRICH, WSJ
LONDON—A top British regulator is calling for a sweeping overhaul of the London interbank offered rate, removing it from the control of a banking-industry group, empowering U.K. authorities to penalize wrongdoers and phasing out some versions of the benchmark rate.
Martin Wheatley, a top official at the U.K.'s Financial Services Authority assigned by the British government this summer with proposing an overhaul of Libor, is set to unveil his recommendations in a speech Friday morning. If implemented, the moves would represent by far the biggest changes to the rate since the British Bankers' Association launched it in 1986.
Libor, which underpins interest rates on trillions of dollars of financial contracts, has been at the center of a burgeoning global financial scandal. At least a dozen banks are under investigation for possibly trying to manipulate the rate for their commercial advantage. Libor is based on daily estimates from a group of banks of how much it would cost them to borrow from one another.
Mr. Wheatley launched his review in July, after Barclays BARC.LN +1.68% PLC's roughly $450 million settlement of rate-rigging allegations ignited a political furor in the U.K. and elsewhere.
Some of Mr. Wheatley's recommendations, such as giving the FSA the power to directly supervise Libor and to impose civil and criminal penalties on wrongdoers, will require the British government's blessing, which appears likely. Other elements of his plan will start to take effect quickly.
Among the immediate changes: Mr. Wheatley said he will launch a process on Friday to invite organizations to bid to take over Libor from the BBA, which he says "clearly failed to properly oversee the Libor setting process and should take no further role" in running it.
The BBA has been aware for weeks that Mr. Wheatley was likely to strip them of control of Libor, according to people familiar with the matter. The private organization, which represents about 200 banks with U.K. operations, said Thursday that it supports Mr. Wheatley's recommendation. A vote of BBA members earlier this month cleared the way for the upcoming bidding process.
Mr. Wheatley said in an interview Thursday that he is aware of multiple outside organizations, potentially including commercial providers of financial data, that might be interested in taking control of Libor. Thomson Reuters Corp., for example, currently collects Libor data from banks and compiles it for the BBA. A top Bloomberg LP executive, meanwhile, has publicly expressed interest in providing a financial benchmark similar to Libor.
The decision of who will wind up with Libor "is primarily driven by finding someone who can bring integrity and believability back into the system," Mr. Wheatley said in the interview. He added that he hopes Libor will be transferred to its new owner within six months.
The Libor scandal has been brewing for years. In 2008, after The Wall Street Journal ran page-one articles documenting concerns about Libor's reliability, U.S. and British regulators launched investigations into potential manipulation.
In response, BBA executives invited U.S. and British regulators and central bankers to take on an oversight role, according to internal documents and emails disclosed as part of a British Parliamentary investigation. The U.S. and U.K. authorities balked, wary of being seen as endorsing the rate.
"There may not have been the political appetite at the time to deal with it," Mr. Wheatley said Thursday.
One of his primary proposals would put the FSA in the driver's seat. The British regulator would have the responsibility for approving the officials who are in charge of submitting Libor data at individual banks. The FSA also would gain the authority to punish individuals who tried to manipulate the rate, a power the agency currently lacks.
Greg Clark, a top official at the U.K. Treasury, called Mr. Wheatley's recommendations "comprehensive and practical," noting that the British government will issue a full response once Parliament returns next month.
When Mr. Wheatley started his review this summer, he said he was prepared to recommend the wholesale abolition of Libor. But he ultimately concluded that such a change would be too disruptive—Libor is embedded in more than $300 trillion of derivatives and other financial contracts—and that there wasn't a clearly superior alternative.
Instead, Mr. Wheatley is advocating a series of smaller, but nonetheless significant, changes.
For example, the BBA currently offers Libor in 10 different currencies, thanks to the BBA's aggressive expansion of the rate in an effort to generate new revenue.
Mr. Wheatley is urging the BBA and whoever inherits the rate to phase out the versions of Libor in the Australian, Canadian and New Zealand dollars, as well as the Danish and Swedish currencies. In all of those currencies, Libor is based on submissions from a relatively small group of banks and therefore is considered less reliable. Overall, Mr. Wheatley is calling for the number of Libor reference rates to fall from 150 to 20 "where we are confident there is a real market to underpin the rates."
Mr. Wheatley also is pushing for an expansion of the number of banks that submit data about their borrowing costs, "if necessary, through new powers of regulatory compulsion. Libor requires collective responsibility if it is to work effectively," he said. Eighteen banks submit data for the main Libor rate, in U.S. dollars.
Another recommendation is for whoever runs Libor to keep thebanks' submissions secret for at least three months. The goal, Mr. Wheatley said, is to remove the temptation for banks to understate their borrowing costs lest the market seize on any increase as evidence that a bank is facing financial trouble—one reason for attempted Libor manipulation at banks such as Barclays.
Write to David Enrich at firstname.lastname@example.org