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BBA consults on dropping certain LIBOR currency calculations

The body currently tasked with administering the London Interbank Offered Rate (LIBOR) is consulting on some of the initial changes recommended by Martin Wheatley in his review of the rate-setting process.09 Nov 2012

The consultation (5-page / 48 KB PDF) outlines the proposed timescale under which the British Bankers Association (BBA) will phase out LIBOR submissions for certain currencies and maturities. In his review, Wheatley recommended that the number of currencies and maturities covered by the rate should be cut "substantially" in order to achieve "a sharper focus on the more heavily used benchmarks".

Wheatley welcomed the BBA's short consultation. The managing director of the Financial Services Authority (FSA) was asked by the Government to review LIBOR after Barclays Bank announced that it was the first to settle with regulators over alleged manipulation of the rate at the end of June. His 10 recommendations (92-page / 1MB PDF), which were published in September, have been accepted by the Government in full.

"I welcome the BBA's first steps towards implementing a key recommendation of the Wheatley review of LIBOR through its consultation on the gradual phasing out of currencies and maturities which needs to be subject to an open process and market feedback to ensure that enough time is given to allow market users to adapt," Wheatley said.

According to the consultation paper, those currencies and maturities where the "underlying trade data is considered insufficient" would be removed from the current LIBOR compilation process by the end of March 2013. Currencies set to be dropped include the Australian and New Zealand dollars, by the end of February 2013, and the Canadian dollar and Swedish and Danish currencies by the end of March 2013. LIBOR rates would continue to be published in the Euro, Japanese yen, pound Sterling, Swiss franc and US dollar.

Nine of the 15 time periods that the rate is currently published in would be dropped from all currencies by the end of January, according to the consultation. Overnight rates and rates for one, three, six and 12 months will still be published daily. The BBA also proposes that it will stop publishing the GBP Repo (repurchase agreement) benchmark by the end of December, as the rate is not used in the financial markets.

The BBA is due to transfer responsibility for the rate to a new administrator in the near future, as recommended by the Wheatley review. The Government has appointed Baroness Hogg to lead a panel to identify an appropriate new administrator. According to the consultation paper, if this happens before the proposed changes are implemented then these will be open to "ongoing review" by the incoming body.

LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is widely used internationally as the pricing basis for some $550 trillion worth of financial instruments including interest rates and currency hedging instruments, and to set the interest rate for syndicated loans. Contribution banks submit their rates directly to business data provider Thomson Reuters, which carries out the calculation and publishes LIBOR rates in 10 currencies at midday every London business day.

On 27 June Barclays announced that it was to pay total penalties worth £290 million to regulators in the UK and US for "misconduct" in relation to LIBOR submissions. The Serious Fraud Office (SFO) has since confirmed that it is investigating "a number of financial institutions" in the UK over alleged manipulation of the rate. It is proceeding under existing fraud and false accounting laws, as there is not yet a specific criminal offence in relation to LIBOR.

Following Wheatley's report, LIBOR-related activities including the administration of the rate as well as banks' own submissions will be brought within the scope of statutory regulation. This will allow the FSA and future regulators to take direct action against firms for misconduct, including financial penalties and banning firms from carrying out other regulated activities. The draft Financial Services Bill, which is currently before Parliament, will also create a new criminal offence of making misleading statements in relation to benchmarks such as LIBOR, as well as amending the wording of existing offences, following Wheatley's recommendations.