Banks seek ‘scientific’ Libor rate process

Seek objective calculation for rate...

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Aug. 10 (Bloomberg) -- The U.K.’s chief markets regulator said banks that set the Libor interest rate are seeking a “scientific” process that will limit future liability from the scandal-ridden benchmark.

Lenders on the Libor panel, which include Royal Bank of Scotland Group Plc and Barclays Plc, would prefer the London interbank offered rate be set “on a very clean basis that takes their risk down,” Martin Wheatley, the managing director of the Financial Services Authority, said in an interview. A “trade reporting mechanism” to calculate the figure based on actual data is one option he is considering as part of proposals to reform Libor that will be released tomorrow.

Wheatley, 53, is conducting a review of the oversight and setting of Libor after Barclays, the U.K.’s second-largest bank, was fined a record 290 million pounds ($453 million) by U.S. and U.K. authorities. Barclays admitted to attempting to rig rates to benefit its ownderivatives trades and to appear healthier during the financial crisis. At least 12 banks, including RBS and Deutsche Bank AG, are being investigated for manipulating Libor and related benchmarks around the world.

The banks “are very clearly apprehensive because of the record fine that was pinned on Barclays,” said Wheatley, who is designated to become chief executive officer of the Financial Conduct Authority when the FSA is split in two next year. “They want as quickly as possible to have a Libor that works and doesn’t expose them” to regulatory and legal risks.

U.K. Chancellor of the Exchequer George Osborne called for the review last month and said Wheatley’s report would form the basis for amendments to legislation currently making its way through Parliament.

Stronger Sanctions

In a discussion paper tied to the review, Wheatley proposed that sanctions for manipulating Libor could be strengthened, a code of conduct could be introduced for banks submitting figures for the benchmark and that the process be overseen by a regulator rather than the British Bankers’ Association.

“This discussion paper demonstrates that we will give regulators the powers they need to prevent the manipulation of key benchmark rates in the future,” said Mark Hoban, Financial Secretary to the Treasury.

Wheatley has begun consulting with panel banks and will seek input from the finance industry over the next four weeks. He is scheduled to present his findings by the end of September, the Treasury said.

Seven Regulators

At least seven authorities, including the Department of Justice, European Commission and Canadian Competition Bureau are investigating whether banks manipulated interest rates to benefit trading positions or appear more financially sound.

Dozens of traders have been caught up in the scandal, either being fired or suspended by their employers or put under investigation by U.K. or U.S. authorities. Mitsubishi UFJ Financial Group Inc. suspended a London-based employee, the third in a month, the bank said yesterday.

“We’ve found quite a lot of bad behavior in this market and we want to fix it,” said Wheatley, who was formerly the chief executive officer of Hong Kong’s Securities and Futures Commission and a deputy CEO of the London Stock Exchange. “We want to make a credible benchmark.”

Libor is derived from a survey of banks conducted each day on behalf of the BBA in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a set number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.

$500 Trillion

Regulators must find a balance between restoring credibility and minimizing disruption to Libor, the benchmark for more than $500 trillion of securities.

Regulators may need to combine actual data from interbank transactions “with a widened definition of relevant funding to include other products such as commercial paper or corporate deposits,” Wheatley said in advance copy of a speech he will give at Bloomberg LP’s London office today.

Any material changes to the mechanism for setting Libor risks invalidating millions of existing financial contracts, Wheatley said. There needs to be some certainty on “the legal risk if we migrate to something else,” he said in the interview.

Bloomberg News

--Editors: Anthony Aarons, Christopher Scinta

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