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Libor System to be overhauled

in International Business

Libor System to be overhauled

A review, headed by the managing director of the Financial Services Authority (FSA) Martin Wheatley, said that the Libor rate-setting system is not a feasible option.

The Libor rate is a fundamental market rate set by the leading banks in London and serves as a benchmark interest rate for trillions of financial contracts including some mortgages.

Barclays Bank recently faced a record 290million Euros fine for rigging Libor rates over several years.

The review suggests the following changes to the system:

 

  • setting Libor using actual market data, rather than subjective submissions from banks
  • making governance of the Libor-setting process independent, for example introducing a code of conduct to establish clear guidelines concerning submissions
  • strengthening sanctions to tackle Libor abuse
  • taking calculations away from the BBA (British Banker’s Association) and placing them in the hands of an outside authority, such as a commercial body or an industry group
  • considering alternative benchmarks for at least some of the types of transaction that currently rely on Libor

The review may also extend to other benchmarks including oil, gold, stock prices and other inter-bank rates in the future, said Mr Wheatley.

The paper is also exploring the option of giving the FSA and the Financial Conduct Authority – which Mr Wheatley will run from next year – new powers to criminally prosecute offenders.

Bank of England governor Mervyn King has said central bankers will discuss reforms to Libor when they meet in September.


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BarclaysLibor system

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