Wheatley FSA's managing director
Wheatley FSA's managing director (Photo: Reuters) Reuters

Martin Wheatley, managing director of the Financial Services Authority (FSA) says that the UK regulator should be handed responsibility for transforming the way Libor is set, as the FSA looks to cut the number of currencies and maturities that make up the benchmark rate.

In a prepared speech, Wheatley - who will lead the Financial Conduct Authority (FCA) when the regulator splits into two entities next year - revealed that organisations will be invited to bid to takeover the British Bankers' Association's (BBA's) role in monitoring Libor.

Wheatley attacked the "careless" way the rate setting process was overseen by the British Bankers' Association, which will be stripped of any further involvement.

Wheatley said that other institutions faced similar punishments to those handed out to Barclays, which was sined £290m in the summer for its attempts to manipulate the rate used to set borrowing costs for companies and households around the world. He told the Today programme that in the extreme cases those who manipulate Libor should go jail.

"Governance of Libor has completely failed, resulting in the sort of shameful behaviour that we have seen," says Wheatley in speech that will later be conducted in London. "This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system."

"We can't allow the unfettered attitude that banks enjoyed previously. Much greater rigour and transparency must be introduced to the process of submission," he will say.

As well as pushing the government to grant the regulator more powers, including requiring rate-submitters to be vetted by the FCA, he adds the regulator plans to end more than 100 Libor rates tied to currencies and maturities where there isn't enough "hard data" to set them properly.

Every day, Libor setters at banks submit their rate levels, which are an estimate of how much it would cost to borrow money from each other on different currencies and products, to Thomson Reuters Corp, which then calculates the data on behalf of the BBA.

The highest and the lowest submissions are stripped from the final set of data and the average rate level is calculated from the remaining submissions and published for individual currencies before midday in London.

Barclays settled with the US Commodity Futures Trading Commission, US Department of Justice and the FSA for £290m for manipulating Libor. Subsequently the UK Serious Fraud Office has opened criminal investigations against Barclays as well as a number of "individuals and banks". It has also lost a number of senior executives, including ex-CEO Bob Diamond who has now been replaced by Antony Jenkins.

However a vast number of banks across the globe, including other UK banks such as HSBC, are under investigation for the rigging of Libor and most recently RBS has been thrown into the spotlight, after more court filings revealed instant messenger transcripts of RBS traders allegedly colluding to manipulate rates.

Three Key Changes to Libor

The final report, which is published on the UK Treasury website, says "the Review has concluded that transaction data should be explicitly used to support Libor submissions. A number of the Review's recommendations are intended to establish strict and detailed processes for verifying submissions against transaction data and limiting the publication of Libor to those currencies and tenors that are supported by sufficient transaction data."

As part of his key three recommendations, Wheatley has subverted some calls for replacing the benchmark rate, by instead reforming it.

The Review claims "that there is a clear case in favour of comprehensively reforming Libor, rather than replacing the benchmark. Libor is used in a vast number of financial transactions; it is estimated that contracts with an outstanding value of at least $300 trillion reference the benchmark.

"A move to replace Libor could only be justified by clear evidence that the benchmark is severely damaged, and that a transition to a new, suitable benchmark or benchmarks could be quickly managed to ensure limited disruption to financial markets. It has become clear that, despite the loss of credibility that Libor has suffered recently, there has been no noticeable decline in the use of Libor by market participants."

Finally, Wheatley's report emphasises that market participants should continue to play a significant role in the production and oversight of Libor.

"While Libor needs to be reformed to address the weaknesses that have been identified, it would not be appropriate for the authorities to completely take over the process of producing a benchmark which exists primarily for the benefit of market participants," says the report.

In the report, Wheatley unveiled a ten-point plan for comprehensive reform of Libor, which includes the introduction of statutory regulation for the administration of Libor, including an Approved Persons regime, meaning that there would be a provision of assurance of credible independent supervision, oversight and enforcement, both civil and criminal.