Libor, the London inter-bank lending rate, is considered to be one of the most crucial interest rates in finance. It is the benchmark against which over $300 trillion (196 trillion pounds) worth of securities, including mortgages, student loans and swaps, are priced. But U.S. and U.K. regulators found traders tried to rig Libor in a scandal that sparked public and political outrage and has to date seen regulators fine three banks a total of $2.6 billion.
British financier Martin Wheatley was named co-chair of a Financial Stability Board task force on Tuesday to look at reform of Libor. The FSB, set up by the G20, will report back next year on whether the benchmark should be changed and over what period.
Reuters noted that the head of the Financial Conduct Authority and co-chair of a G20 review into Libor reform has counseled against rushing into changing how the widely used interest rate benchmark is set, saying on Wednesday that regulators need to be realistic.
Giving the keynote address at the International Derivatives Expo in London, Martin Wheatley said Libor, the London Interbank Offered Rate, needed to be overhauled but there remain limitations on how far and how quickly reform can go.
Looking for a Perfect Solution
Wheatley commented that “We’d like to come up with the perfect solution. We’d like to come up with something that is based on a deep and liquid market, that is based on genuine observable transactions that are themselves regulated, but we’ve also got to be realistic.” The main priority for regulators is to restore trust in the process of setting the benchmark, which would be a model for setting other reference prices in financial markets.
“What we will do is make sure that we have a set of principles that benchmarks should operate to and have thought through the contingency plans if we get to a point when particular benchmarks don’t have the viability and can’t move forward,” he said.
Any more profound change would raise more complex financial questions that regulators do not yet have the answer for, he added.
Wheatley said the FCA and international regulators have already started work to review Libor, but it would take time to settle on an alternative rate-setting system. His recent comments conflict with the view of the U.S. Commodity and Futures Trading Commission, whose chairman has said Libor should be scrapped and replaced with a reference rate based on actual market transactions.