UK to transfer control of Libor to restore trust

UK to transfer control of Libor to restore trust
The British Banking Association (BBA) has voted to formally transfer control of the London Interbank Offered Rate (Libor) in hopes of resolving a scandal that tarnished London's lending standards.

The official search for a new Libor administrator has commenced, following the BBA’s vote on Monday to abdicate power to a business chosen by a selection committee. Thomson Reuters and Bloomberg have both expressed interest.

Sarah Hogg, chair of the Financial Reporting Council, will oversee the selection process to choose a new Libor entity, and will be joined by FCA Head Martin Wheatley.

The appointment of a new Libor administrator is crucial to restoring confidence in the international lending benchmark and in maintaining the reputation of the UK’s financial services industry, the Treasury said.

The absolute priority is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators,” a BBA spokesperson said.

The committee said the lending benchmark will still be compiled daily by averaging submissions from banks.

Mark Carney, governor-elect of the Bank of England, while addressing a group of students at Ivey business school in Ontario, Canada, on Monday, expressed skepticism over banks setting the rate: “The Libor-setter sees only the numbers on the screen as a game to be won, ignoring the consequences of his or her actions on mortgage-holders or corporate borrowers.

The rate is calculated every morning at 11:00am by the BBA, based on borrowing projections from a panel of banks spanning 10 currencies.

Thomson Reuters and Bloomberg have expressed interest in controlling the Libor rate, as neutral data providers or bank ‘outsiders.’

Thomson Reuters has been responsible for Libor administration for the last 25 years, and has said it would like to take full control of the system. Bloomberg, NYSE Euronext and Rate Validation Services also voiced interest.

All interested parties have proposed an index that would include market-based quotes and transaction-based data, and would not solely rely on bank estimates.

Trillions of pounds worth of corporate loans, derivatives, mortgages and financial contracts are pegged to the inter-bank lending rate.

The committee hopes to shake a scandal, and restore credit to the Libor, after banks started rigging the rate in early 2005 to profit from derivatives trading.

Barclays, UBS and Royal Bank of Scotland were fined a total of $2.6 billion for manipulating rates, and more than a dozen banks are under investigation. In June 2012, Barclays paid £290 million in total fines to US and UK financial agencies. 

Rabobank Groep faces a fine of more than $440 million for Libor-rigging as global regulators continue to crack down on the eight-year rate-exploitation scandal.

The scandal forced both Barclays chief executive Bob Diamond and chair Marcus Agius to resign. New Barclays chief Anthony Jenkins now has insisted employees sign a ‘code of honor’ to avoid future rigging scandals.