British Banker’s Group Might Lose Its Control Over LIBOR Setting

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The British Bankers’ Association may lose its control over the  setting of the benchmark interest rate, known as the LIBOR (London interbank offered rate), which underpins more than $360 trillion of financial instruments worldwide.

The announcement of the same could come as early as Friday, according to a person with direct knowledge of the matter. The announcement might come at a time of review of the LIBOR by Martin Wheatley, managing director of the Financial Services Authority, the British regulator.

The benchmark interest rate has been under attack recently, following the rate rigging scandal involving various big names. The British government has since been asking for changes to the LIBOR.

Following the scandal Barclays PLC (LON:BARC) (NYSE:BCS) chief executive, Robert Diamond Jr., and its chairman, Marcus Agius, resigned, and the company agreed to pay $450 million in June to settle charges that some of its traders manipulated the rate for financial gains, and also some of its traders may still face criminal prosecution. Apart from Barclays PLC (LON:BARC) (NYSE:BCS), several other banks including UBS AG (NYSE:UBS) and Citigroup Inc. (NYSE:C) are also under investigation for their alleged involvement in the manipulation of the benchmark rate.

The British Bankers’ Association was the one which established LIBOR in 1986, and since then has been setting the same. Following the scandal, regulators have persistently raised questions on the association’s role in the scandal. In documents released by the Bank of England in July, authorities called on the group to change the Libor rate-setting process. Currently the setting process involves a daily poll of a number of banks about the interest rate they would pay to borrow money from the capital markets.

According to the central bank documents, Angela Knight, British Bankers’ Association’s chief executive at the time had asked the regulators to get closely involved in the rate-setting process, but authorities paid little attention to that. But, after ripping the banker’s group from the rate setting process, the authorities will now get more directly involved.

Just a day before, Gary Gensler, chairman of the Commodity Futures Trading Commission in the United States, remarked while addressing the European Parliament via video from Washington, “It is time for a new or revised benchmark – a healthy benchmark anchored in actual, observable market transactions – to restore the confidence of people around the globe, that the rates at which they borrow and lend money and hedge interest rates are set honestly and transparently.”

British Bankers’ Association promised to co-operate with British authorities about potential changes to the rate, according to a statement from the association: “If Mr Wheatley’s recommendations include a change of responsibility for Libor, the B.B.A. will support that.” However, the spokesman for the British Bankers’ Association declined to comment on whether the organization would lose control of setting Libor.

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