Review may scrap Libor rate

Barclays Bank, pictured in central London, is the first bank to settle in a global investigation into Libor fixing.

Story highlights

  • UK goverment says Libor could be replaced with interest rate set using actual trades
  • UK officials announced Martin Wheatley to lead review
  • Global furor over banks alleged to have manipulated Libor

Libor, the London Interbank Offered Rate, could be scrapped altogether and replaced with an interest rate that is set using actual trades, according to a review set up by the UK government.

Ministers on Monday announced the remit for Martin Wheatley to investigate the Libor benchmark rate, which has been heavily criticised after it emerged that Barclays and several other leading banks manipulated it. Mr Wheatley is the chief executive-designate of the new Financial Conduct Authority, the incoming City watchdog,

Banks 20 years behind in risk management

The terms of reference for the Wheatley review include considering whether the rate should be set based on transactions made by traders, rather than the estimate of the rate at which their banks are borrowing at any given time.

Mr Wheatley said: "This benchmark rate is used globally for trillions of dollars worth of financial contracts. Therefore, it is clear that urgent reform of the Libor compilation process is required.

"Such reform may include amendments to the technical definitions used for Libor, the associated governance framework and the role of official regulation. The review will also consider whether similar measures are required for other existing benchmarks."

The government was previously reluctant to allow regulators to use banks' actual trades to monitor transactions and exchanges.

The Serious Fraud Office said on Monday that it was probing "a number of financial institutions" in relation to manipulation of Libor and "related interest rates", in a decision that could help US prosecutors extradite suspects, according to legal experts.

A political furore was sparked when Barclays became the first bank to settle in the global investigation, which involves at least 10 authorities over three continents examining whether 20 companies rigged Libor, and their Tokyo and Brussels equivalents, Tibor and Euribor.

Subsequent calls from politicians that criminal charges should await bankers found to have manipulated Libor heaped pressure on the SFO to reconsider its decision last year not to get involved in the probe.

George Osborne, the chancellor, was forced to admit to parliament that the FSA's criminal powers did not extend to Libor or derivatives, legislation that is now under review. The Treasury also heeded calls that the SFO needed extra resources to undertake what could be its largest investigation, ringfencing an extra £3m for the Libor probe.

The SFO said on Monday that it was satisfied that existing legislation could have been breached, meaning that US authorities could technically extradite suspects: they can only charge non-US citizens with a crime that is also an offence in their home country, legal experts said. The US investigation is examining whether laws including the Commodities Exchange Act have been violated. Previous convictions under the law have carried jail sentences as long as 14 years.

Barclays gained partial immunity through co-operation with antitrust officials in the EU and UBS has previously disclosed it won immunity from US officials. The Swiss bank was sanctioned, along with Citigroup, for attempted manipulation of yen Libor and Tibor by Japanese regulators in December.

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