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FCA could compel banks to contribute to LIBOR to 'protect representativeness' of rate

Banks could be forced to contribute to the setting of a major benchmark interest rate where necessary to ensure the rate is "representative", the UK's Financial Conduct Authority (FCA) has said.14 Jun 2017

The regulator is consulting on the use of its power to compel firms to contribute to the London Interbank Offered Rate (LIBOR), a benchmark interest rate underpinning around $220 trillion worth of financial transactions worldwide. It intends to implement this power in line with the proposed power for financial regulators to force contributions to 'critical' benchmarks under the EU's Benchmarks Regulation (BMR), which will come fully into force in 2018.

The FCA has proposed using its compulsion powers only where "necessary for market integrity or consumer protection", due to the potential costs to firms that contribute to the rate. Any compulsion measures would be short-term in nature, lapsing once any risks to market integrity have passed, according to the consultation, which closes on 12 August.

LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is administered by ICE Benchmark Administration (IBA), and based on input data contributed by banks.

The European Commission is expected to designate LIBOR as a 'critical' benchmark subject to the provisions in the BMR later this year, according to the FCA.

The FCA said that the "reliability and accuracy" of the rate were "very important to market integrity".

The IBA currently relies on submissions from 20 different global banks when calculating LIBOR in various currencies, between 11 and 17 of which contribute depending on the currency. The FCA could use its compulsion powers to expand this pool where necessary, potentially requiring some banks to contribute for the first time.

Any new contributors to the rate would be chosen with the "close cooperation" of their national regulators, and in consultation with the European Securities and Markets Authority (ESMA) and other regulators that make up the LIBOR 'college', according to the FCA. Participants would be chosen based on their "actual and potential participation" in the relevant market, and would be required to be of good credit quality and have a presence in the UK.

Banks chosen to contribute to the rate for the first time would be expected to invest in their "capacity to make contributions in accordance with the LIBOR code of conduct and the applicable law", according to the consultation. The FCA has asked respondents to its consultation about the likely time and costs that would be required in order to "establish a unit capable of contributing LIBOR submissions based on transactions, and submissions based on expert judgement".

The FCA said that it was not as yet able to finalise the most appropriate methodology for pre-selecting the banks it could compel to contribute to LIBOR in the future. It would do so once it had fully assessed the market, and take into account responses to its consultation paper, it said.