Its new consultation paper proposes that the body which will replace the British Bankers Association (BBA) as LIBOR administrator be required to corroborate submissions to the rate, and monitor these for any suspicious activity. Banks submitting data to benchmarks will be required to have a clear policy on conflict of interest in place, as well as appropriate systems and controls.
The regulator is also seeking views on ways to expand the group of banks that make submissions to the LIBOR rate, something which it said would benefit the "accuracy and reliability" of the benchmark. This could include the use of new powers, proposed by the Government, to compel firms to contribute to the rate on a permanent basis.
The FSA's proposals follow Martin Wheatley's Government-commissioned review of LIBOR, which was published in September. Wheatley recommended that submitting data to, and the administration of, LIBOR become regulated activities. The Government later accepted the recommendations in full, and has already made the necessary legislative amendments.
Wheatley is the current managing director of the FSA and will become head of the Financial Conduct Authority (FCA) when it takes over the conduct and compliance functions of the current regulator from April next year. The FCA will be responsible for the oversight of regulated activities relating to benchmarks.
"Confidence and trust are critical to financial markets," Wheatley said. "The disturbing events uncovered in the manipulation of LIBOR have severely damaged that trust. [These] proposals will bring in clear rules for the setting and governance of benchmarks and are a key step to ensuring the integrity of LIBOR."
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.
The Government commissioned Wheatley to carry out an independent review of the regulation of LIBOR in July. This was promoted by an announcement by Barclays Bank on 27 June 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.
The Financial Services Bill, which is currently before Parliament, will bring LIBOR-related activities within the scope of statutory regulation under the Financial Services and Markets Act (FSMA). This will allow the FSA and future regulators to take direct action against firms for misconduct, including imposing financial penalties and banning firms from carrying out other regulated activities. The Bill will also create a new criminal offence of making misleading statements in relation to benchmarks, as well as amending the language of existing offences.
The FSA consultation anticipates the creation of a new, independent administrator which will take over administration of the rate from the BBA. Baroness Hogg has been appointed to the Government to lead a panel that will identify an "appropriate successor" body. In addition to being required to corroborate submissions and monitor them for any suspicious activity, this new administrator will be required to create and maintain a code of conduct for submitters.
Firms submitting data to benchmarks will be required to have appropriate governance arrangements to oversee the submission process in place, as well as clear policies on conflicts of interest. They will be required to put a specific person, approved by the regulator, in charge of submitting their daily estimates.
The Government has said that LIBOR will be the only benchmark regulated under the initial set of rules. However it has indicated that the regulatory framework could be used to criminalise the manipulation of other benchmarks if appropriate at a later date, such as those relating to the energy or commodities markets. The FSA's proposals reflect this position.