Libor reform risks invalidating mortgages, financial contracts

Widened Definition

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 the speech today.

Wheatley has begun consulting with banks that submit Libor rates 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.

Wheatley 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 RBS and Barclays, would prefer Libor be set “on a very clean basis that takes their risk down,” Wheatley said. 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 released today.

Seven Authorities

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.

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