Posted on 25 Sep 2012 by Neilson
The British Bankers' Association is preparing to give up responsibility for the London interbank offered rate, or Libor, the scandal-plagued benchmark interest rate that the group once called "the world's most important number."
The council of the BBA, a private trade association, voted earlier this month to give up management of Libor, according to people familiar with the matter. The move clears the way for what is likely to be the biggest change in Libor's 26-year history, and introduces the possibility that British or international regulators could be in charge of overseeing the rate, which is tied to trillions of dollars of financial contracts.
Government officials and regulators around the world have been pushing for an overhaul of Libor, now at the center of a financial scandal in which at least a dozen large international banks are under investigation in the U.S., U.K. and elsewhere for allegedly trying to manipulate the rate. The one bank that has settled charges, U.K. lender Barclays PLC, saw its chairman and chief executive quickly ousted after reaching the deal in late June.
Martin Wheatley, a top regulator at the U.K.'s Financial Services Authority, has been conducting a government-commissioned study of Libor's future and is expected to unveil his recommendations on Friday. In a speech last month, he said it was unclear whether a private, unregulated trade group like the BBA was well-positioned to be in charge of a crucial benchmark used in financial contracts around the world.
The vote earlier this month reflected the council's expectation that Mr. Wheatley is likely to recommend stripping the BBA of oversight responsibility, and the council wanted to signal that London's financial community wouldn't resist his recommendation, the people familiar with the matter said.
The BBA created Libor in 1986 as a way to help its members set interest rates on syndicated corporate loans and based it on a survey of what it cost various banks to borrow money from each other. The rate quickly went from obscurity to ubiquity. By 2009, the BBA was referring to Libor as "the world's most important number."
The BBA council, which consists of top executives from 25 banks that are among the BBA's more than 200 members, voted to give up responsibility for Libor at its semiannual meeting on Sept. 13, according to those people.
The vote was reported earlier Tuesday by Sky News.
"The BBA seeks to work with the Wheatley review team as they complete their consultation on the future of LIBOR," a BBA spokesman said in a statement. "If Mr. Wheatley's recommendations include a change of responsibility for LIBOR, the BBA will support that."
An FSA spokesman declined to comment.
One uncertainty is who would take over running and overseeing Libor from the BBA. One possibility is that it could be run by a private company but overseen by public authorities. In the past, however, the BBA concluded that the uncertainty hanging over Libor meant it would be hard to find a third party to buy it.
It also is unclear which regulatory bodies might inherit oversight responsibilities for Libor. Among the options would be the Bank of England, which is set next year to assume responsibility for regulating the British financial sector. Other possibilities include the Financial Stability Board, a body that consists of regulators from around the world and which is already conducting a review of Libor, or the Bank for International Settlements, the Switzerland-based organization that serves as a sort of clearinghouse for central banks.
On Monday, Gary Gensler, the head of the U.S. Commodity Futures Trading Commission, called for Libor to be tied to observable market transactions, not on banks' estimates of their borrowing costs, or for a new benchmark to be created. He told the European Parliament that the rate remains vulnerable to bank misconduct.
Regulators previously have resisted approaches from the BBA over Libor. In 2008, Angela Knight, the BBA's chief executive at the time, asked regulators at the FSA, the Bank of England and the Federal Reserve Bank of New York to help oversee Libor, but they resisted, wary of being seen as endorsing the benchmark rate, according to people familiar with the matter and documents and emails released as part of a British Parliamentary investigation.
BBA executives debated among themselves in 2008-2009 whether to sell or spin off its Libor business into a separate entity to wash the association's hands of what was already becoming an increasingly controversial rate, according to these people. But the BBA ultimately opted to retain the rate, partly because of the revenue it was generating, these people said.