Engulfed by the manipulation scandal, the Libor rate is in shambles and needs a radical rethink. But it won't be archived. Today Martin Wheatley, director of the Financial Service Authority (FSA), the body that controls the British markets, illustrated at Mansion House the recommendations prepared for the government of David Cameron (and contained in a report published this morning).
This is the biggest transformation of Libor since it was introduced in 1986. Starting with who will exercise control over a rate which is the basis of numerous financial transactions estimated by the London Financial Service Authority (FSA, similar to our Consob) in at least 300 billion dollars in the world. Thus the Libor, in the proposal, will no longer be under the control of the British Bankers' Association (BBA) which launched it but will be held directly by the FSA.
Wheatley then also asks for civil and criminal penalties for those who make a mistake. The rate will continue to depend on the daily estimates of a panel of banks but the responsibility will be entrusted to an independent organization (Thomson Reuters would be among the interested parties). The rate will then be simplified by eliminating several currencies (including Australian, Canadian and New Zealand dollars as well as the Danish and Swedish krona) and seldom used rates (reducing them from 150 to 20).
The goal is to make Libor as close to reality as possible because it is determined by observable transactions, removing it from the field of discretion and opening it up to more players (only 16 banks indicated the rate at which they obtained loans in conflict of interest with traders' remunerations ). For Wheatley, Libor needs collective responsibility to function and must go back to doing what it was born to do "rather than what traders and unscrupulous individuals want it to do".
Attachments: wheatley_review_libor_finalreport_280912.pdf
