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Additional benchmarks could be included within scope of LIBOR regulations

The Government could use draft laws relating to the regulation of the London Interbank Offered Rate (LIBOR) to criminalise the manipulation of other benchmarks, such as those reflecting the energy or commodity markets, it has said.30 Nov 2012

It is seeking views on whether it should bring additional benchmarks within the scope of its draft regulations (50-page / 417KB PDF) at this stage. The regulations will define which "relevant benchmarks" will become regulated under the Financial Services and Markets Act (FSMA), while the manipulation or attempted manipulation of such benchmarks will also become a criminal offence. For the time being, LIBOR is the only "relevant benchmark" specified by the legislation.

As part of his independent review of LIBOR, commissioned by the Government in the wake of a high profile settlement between Barclays Bank and regulators in the summer, Martin Wheatley recommended that other important benchmarks be scrutinised. He said that, where appropriate, the recommendations in his report should be applied to these benchmarks alongside other internationally agreed principles.

Financial Secretary to the Treasury Greg Clark said that the Government was "committed to restoring global confidence" in LIBOR. It has accepted the recommendations of the Wheatley Review in full.

"The Government has acted swiftly and is implementing Martin Wheatley's recommendations as quickly as possible – introducing legislation that brings LIBOR within the scope of regulation and creating new criminal sanctions for attempted manipulation of LIBOR," he said. "Recent events have illustrated that LIBOR might not be the only benchmark subject to attempted manipulation. We are consulting on whether further benchmarks should be brought within the scope of regulation."

Allegations that companies operating in the UK gas market distorted benchmark prices were published in the Guardian earlier this month. In a statement to Parliament at the time, Energy Secretary Ed Davey drew parallels between the report and allegations of misconduct by major banks in relation to LIBOR and other benchmark interest rates.

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, who is the managing director of City watchdog the Financial Services Authority (FSA), to carry out an independent review of the regulation of LIBOR in July. This was prompted 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, is to be amended to bring LIBOR-related activities within the scope of statutory regulation under the FSMA. 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 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 consultation is open until 24 December. The finalised regulations will be laid before Parliament once the Financial Services Bill receives Royal Assent, which is anticipated to take place by the end of this year or early in 2013.