Martin Wheatley, FSA boss, says Libor is ‘no longer fit for purpose’ and intends to make Libor manipulation a criminal offence
Libor is “no longer fit for purpose” the head of the panel set up by the government to review the benchmark interest rate will admit on Friday as he formally launches a month-long consultation intended to restore confidence in financial markets.
Martin Wheatley, a senior Financial Services Authority executive, will spell out that Brussels intends to make the manipulation of Libor a criminal offence and that his review will look beyond the interest rate markets to scrutinise other unregulated markets.
The review was prompted by the furore over the £290m fine imposed on Barclays for trying to manipulate the Libor rate. The discussion paper, launchedon Friday , makes clear that Barclays is “only the first of a number of investigations the FSA is carrying out into contributing banks”.
Tracey McDermott, who was appointed to the role of head of enforcement at the FSA, has said that seven other institutions – not all banks – are being investigated. She was previously “acting” in the role.
As he launches the paper, Wheatley will say that Libor – the London interbank offered rate used to set prices on $300tn of financial products – is an “integral part of the modern financial system” but needs overhauled, and in some instances may even need to be replaced in the wake in the scandal gripping the banking industry.
Among the areas that might be covered by his review are the commodities markets where the so-called spot price – the current price – is not directly regulated.
“Beyond Libor, the future for other benchmarks is also under scrutiny,” Wheatley will say. He will say also that the “existing structure and governance of Libor is no longer fit for purpose and reform is needed”.
“The past few months have presented a series of very significant reputational challenges for the financial services industry. The attempted manipulation of Libor and its European equivalent Euribor have cast a shadow over the industry at large and the construction and governance of these benchmarks themselves,” Wheatley will say.
Wheatley, who will become the head of the Financial Conduct Authority, which is being spun out of the FSA next year, is thought to be ready to consider that Libor should be overseen by a commercial body in a similar fashion to the way the FTSE stock market indices are managed by FTSE International.
Libor is currently set by a panel of banks being asked the price at which they expect to borrow over 15 periods, from overnight to 12 months, in 10 currencies, and is overseen by the British Bankers’ Association.
The paper will concede that banks have a motivation to manipulate submissions “either to signal their perceived institutional creditworthiness or to support trading positions”.
It will ask whether a code of conduct should be introduced to “establish clear guidelines relating to policies and procedures” and whether some of the individuals involved in making Libor submissions should become “authorised” persons, making it possible for the FSA to take action against them. Responses are required by 7 September .