LONDON (Reuters) - The Financial Services Authority (FSA) delivered a 10-point plan to fix Libor but stopped short of scrapping the benchmark interest rate in a much-awaited reform of a system plagued by scandal.
"The system is broken and needs a complete overhaul," said Martin Wheatley, head of the FSA.
Wheatley acknowledged problems with London interbank offered rates, but said Libor is so deeply entrenched in the financial system that it cannot be easily replaced.
There are no better alternatives now and any transition to a new benchmark would be difficult, he said on Friday, adding that it made sense for market participants to examine whether there are other possible benchmark rates in the longer term.
The government sees the reform of Libor as critical to restoring global confidence in London as a financial centre.
"The longer the situation prevails that trust has been eroded, the more difficult it is to restore," financial services minister Greg Clark told Reuters.
The FSA plan, which includes oversight by a new panel from 2013, marks regulators' first effort to fix the tarnished benchmark, but rule makers have to thread the needle carefully.
On the one hand, they must restore confidence in the financial system; on the other, they cannot take steps that are too radical without creating big trouble with existing transactions that use the benchmark, with some home loans using Libor stretching out 65 years.
More than $300 trillion (185.2 trillion pounds) of contracts and loans ? from U.S. mortgages to Japanese interest-rate swaps - refer to Libor.
"Bringing Libor under an independent regulator will take away the notion that this was a system run by banks for the benefit of banks," said Matthew Fell, director for competitive markets at the Confederation of British Industry lobby group.
CHARGES OF MANIPULATION
Most responses to Wheatley's plan were supportive, but Stephen Gilchrist, head of regulatory law at Saunders Law, said regulation of individuals as proposed had not stopped abuses.
"The FSA only authorise persons in the financial services sector who pass a ?fit and proper' test which goes to probity and integrity. Where has that got us in the recent past?" Gilchrist said in an email.
Multiple banks have been accused of trying to manipulate Libor, a series of rates set daily in London. Barclays Plc in June agreed to pay $453 million to U.S. and British authorities to settle allegations that it tried to move Libor to help its trading positions.
Wheatley's programme for reform includes auditing banks that contribute data used to calculate the rates, to ensure they are not submitting false rates to benefit trading positions.
Libor, which is meant to reflect the rates at which banks borrow from one another, will include actual borrowing transactions. Previously, banks could estimate where they think they would borrow, which left room for manipulation.
Bank employees making Libor submissions will have to be approved by the FSA. Wheatley is looking for authorisation to criminally sanction those who attempt to manipulate the rate.
Wheatley said he had taken legal advice and does not expect a rash of legal disputes or any disruption in the transition to a new system, as there will be no change to the definition of Libor or to the timing or mechanism for submitting quotes.
Reuters parent company Thomson Reuters collects information from banks, and uses it to calculate Libor rates according to specifications drawn up by the British Bankers Association (BBA).
CULL OF RATES
The number of Libor rates will be culled from 150 to 20 with more banks required to contribute to the remaining ones.
As expected, the BBA, which had overseen the rate, will be replaced with a new, as-yet unidentified oversight panel.
The BBA said it worked closely with Wheatley on his review and had stated the need for greater regulatory oversight of Libor and tougher sanctions against manipulation.
A major remaining problem is that in financial crises, such as the one in 2008, banks cease lending to one another, effectively removing data needed to calculate Libor.
"More thought on how Libor operates during a stressed scenario is needed," said Kevin Burrowes, head of financial services at PricewaterhouseCoopers.
Mervyn King, governor of the Bank of England, said: "Over the medium to long term, further thinking will be needed to meet the challenge of benchmarks based on thinly traded markets, especially when they are quote-based."
The reforms come amid more crackdowns on the banks that submitted rates used to calculate Libor. Royal Bank of Scotland is expected to be next to settle Libor charges, with other banks to follow.
Britain's government commissioned Wheatley to report on reforming Libor and is expected to back the findings in full. Legislative changes will be inserted into a financial services bill now being approved by parliament.
(Additional reporting by Rick Rothacker in Charlotte, North Carolina and Carrick Mollenkamp and Jennifer Saba in New York; Writing by Dan Wilchins and Steve Slater; Editing by Edmund Klamann and David Holmes)
Source: http://news.yahoo.com/fsa-says-broken-libor-needs-complete-revamp-013916275--finance.html
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