Libor reform risks invalidating mortgages, financial contracts

Martin Wheatley, managing director of the Financial Services Authority Martin Wheatley, managing director of the Financial Services Authority

Aug. 10 (Bloomberg) -- The U.K.’s chief markets regulator said that material changes to the way Libor is calculated risks invalidating millions of financial contracts, covering products ranging from mortgages to derivatives.

There needs to be certainty on what would happen to banks and investors if another benchmark is adopted, said Martin Wheatley, the managing director of the Financial Services Authority, who is conducting a review of the oversight and setting of the London interbank offered rate.

“Any migration to new benchmarks would require a carefully planned and managed transition in order to limit disruption to the huge volume of outstanding contracts that reference Libor,” Wheatley said following a speech at Bloomberg LP’s office in London today.

Wheatley, 53, is conducting the review after Barclays Plc, the U.K.’s second-largest bank, was fined 290 million pounds ($453 million) by U.S. and U.K. authorities in June. Libor is the most frequently utilized benchmark for interest rates globally, referenced in transactions with a value of at least $300 trillion.

Barclays admitted to attempting to rig rates to benefit its own derivatives trades and to appear healthier during the financial crisis. At least 12 banks, including Royal Bank of Scotland Group Plc 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,” Wheatley, who is designated to become chief executive officer of the Financial Conduct Authority when the FSA is split in two next year, said in a separate interview yesterday. “They want as quickly as possible to have a Libor that works and doesn’t expose them” to regulatory and legal risks.

Osborne Legislations

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

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. “The government is also working with its international partners to inform the international work in this area and work towards a globally consistent solution.”

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