Using Actual Trading Data To Determine Libor After Scandal?

Using Actual Trading Data To Determine Libor After Scandal?

The British financial markets regulator, Financial Services Authority, has today, through its director, Martin Wheatley disclosed its intentions to overhaul the Global Financial Benchmark rate system, London Interbank Offered Rate, or Libor. This comes at a time when public has expressed its anger over the saga, and indeed this would be some response by the regulatory body.

According to New York Times’ Dealbook, Martin Wheatley, the British regulator in charge of overhauling the rate-setting process, outlined plans today that could lead to wholesale changes to Libor. The rate is used as a benchmark rate for more than $360 trillion of financial products world wide, and it is therefore almost unimaginable of the magnitude of the impact resulting from the manipulation of the rate.

The current system is run by the British Bankers Association, a trading body, which is likely to be replaced by the regulatory body, that will make it a criminal offence to manipulate benchmark rates.

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Mr. Wheatley is quoted in the report saying, “The existing structure and governance of Libor is no longer fit for purpose and reform is needed.” Pointing on the weaknesses in the current system, he added, “trust in a vital part of the financial system has been badly damaged and timely action is needed to restore it.”

Wheatley’s words do indeed sound very tough, but rightly so. Barclays PLC (LON:BARC) (NYSE:BCS) has already parted with $450 million, in relation to the scandal that involved some of its top executives, who manipulated the Libor rate for personal interest. The culprits have since left the giant multinational, and could soon face criminal charges, according to the report.

Additionally, Barclays PLC (LON:BARC) (NYSE:BCS)’s payment did trigger interest from other victims of the manipulated benchmark rate. In one of our recent posts, we highlighted various hedge fund and private equity firms that are pushing for compensation over lost value in their investments, which were either loaned at lower rates, or borrowed at higher rates accordingly.

We highlighted that the likes of Citigroup Inc. (NYSE:C), HSBC Holdings plc (LON:HSBA) (NYSE:HBC), and Bank of America Corp (NYSE:BAC), among others, who could also be end up being part of the, now estimated, $20 billion worth of fines and penalties.

The prospective changes to Libor could include the use of actual trading data incoming up with the daily benchmark rate, and consequently, scraping the current cartel like system that involves major banks estimating their likely cost of lending in the market, and submitting for an average rate to be derived.

The report notes that, during the financial crisis of 2008/2009, interbank lending between firms was drastically halted, and this pressured bank executives to submit incorrect data for Libor, according to regulatory filings.

However, in order to counter such cases in the prospective setting, the report quotes Wheatley saying, “Libor is also intended to represent unsecured interbank borrowing costs for a range of maturities, but as this type of lending has severely declined since the financial crisis, submissions are more heavily reliant on judgment,”

Mr. Wheatley is very keen on ensuring transparency in the new system, as he says, “any new governance framework should ensure that the compilation process itself is subject to a much greater degree of independence, transparency and accountability.”

This will make sure that cases of distrust in the system are not raised by various banks across the world, as exhibited in 2008, when first signs of unreliability came to light from British and American central bankers. They were very uncomfortable with the way British Bankers Association was conducting its business, with regard to Libor monitoring.

Mr. Wheatley concluded by highlighting his belief that banks would back the overhaul process, by saying, “the past few months have presented a series of very significant reputational challenges for the financial services industry, and it’s clear from the reaction to the Libor scandal that consumers think it’s important.”

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