LIBOR Reform for Dummies

LIBOR is broken

Martin Wheatley, chief executive-designate of the Financial Conduct Authority, has said Libor rate-setting is ‘no longer viable’.

Mr. Wheatley has come up with a 10 point plan for renovating the LIBOR.

You may skip the 10 points as they not relevant or even funny.

Regulation of LIBOR

1. The authorities should introduce statutory regulation of administration of, and submission to, LIBOR, including an Approved Persons regime, to provide the assurance of credible independent supervision, oversight and enforcement, both civil and criminal.

 Institutional reform

1. The BBA should transfer responsibility for LIBOR to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing credible internal governance and oversight. This should be achieved through a tender process to be run by an independent committee convened by the regulatory authorities.

1. The new administrator should fulfil specific obligations as part of its governance and oversight of the rate, having due regard to transparency and fair and non-discriminatory access to the benchmark. These obligations will include surveillance and scrutiny of submissions, publication of a statistical digest of rate submissions, and periodic reviews addressing the issue of whether LIBOR continues to meet market needs effectively and credibly.

The rules governing LIBOR

1. Submitting banks should immediately look to comply with the submission guidelines presented in this report, making explicit and clear use of transaction data to corroborate their submissions.

1. The new administrator should, as a priority, introduce a code of conduct for submitters that should clearly define:

–          guidelines for the explicit use of transaction data to determine submissions;

–         systems and controls for submitting firms;

–         transaction record keeping responsibilities for submitting banks;

–         and a requirement for regular external audit of submitting firms.

Immediate improvements to LIBOR

1. The BBA and should cease the compilation and publication of LIBOR for those currencies and tenors for which there is insufficient trade data to corroborate submissions, immediately engaging in consultation with users and submitters to plan and implement a phased removal of these rates.

1. The BBA should publish individual LIBOR submissions after 3 months to reduce the potential for submitters to attempt manipulation, and to reduce any potential interpretation of submissions as a signal of creditworthiness.

1. Banks, including those not currently submitting to LIBOR, should be encouraged to participate as widely as possible in the LIBOR compilation process, including, if necessary, through new powers of regulatory compulsion.

 

1. Market participants using LIBOR should be encouraged to consider and evaluate their use of LIBOR, including the a consideration of whether LIBOR is the most appropriate benchmark for the transactions that they undertake, and whether standard contracts contain adequate contingency provisions covering the event of LIBOR not being produced International co-ordination.

1. The UK authorities should work closely with the European and international community and contribute fully to the debate on the long-term future of LIBOR and other global benchmarks, establishing and promoting clear principles for effective global benchmarks .

 

Run down:

To boil down the convoluted doubletalk:

a)      The LIBOR is broken, but too many loans and other stuff hang on it, so we can’t really do anything.

b)      The British Bankers Association is to be evicted and a new oversight committee is formed.

c)       Severe punishment for manipulators.

d)      A broader forum of banks.

e)      Basis is to be done deals.

 

Comment:

Apart from bringing back hanging – in as nasty a way as possible – nothing addresses the issue. I can’t help but agree with:

”In a financial crisis there isn’t sufficient transactions” says Rosa Abrantes-Metz from Wirtschaftsinstitut Global Economics Group.

To Frankfurter Allgemeine Zeitung.

The Danish Central Bank (Nationalbanken) is in a similar conundrum with the CIBOR rate and a reasoning along the same line as the British:

Again the point is that a market based interest rate does not work as there is:

1. No market. In Denmark the deposits in the Central Bank are 250 bio. DKK or 10%-15% of the annual GDP – in CASH – at an interest rate below zero. Speaking of which there are 38 bio. DKK in sovereign bonds of less than one year maturity and treasury notes of 58 bio.  DKK of even shorter maturity where interest rate is negative.