LONDON — The system at the center of the rate-rigging scandal is set to be overhauled as regulators respond to public anger over the manipulation of the London interbank offered rate, or Libor.
Martin Wheatley, the regulator in charge of a plan backed by the British government to restructure the rate-setting process, outlined steps on Friday that could lead to wholesale changes to Libor, which is used as a benchmark rate for more than $360 trillion of financial products, including mortgages and loans.
The changes may include the replacement of the current system, which is overseen by the British Bankers’ Association, a trade body, with one overseen by government officials. They will also most likely make it a criminal offense to manipulate benchmark rates.
“The existing structure and governance of Libor is no longer fit for purpose and reform is needed," said Wheatley, who is managing director of the Financial Services Authority, the British regulator. “Trust in a vital part of the financial system has been badly damaged and timely action is needed to restore it."
The tough words came after one of Britain’s biggest banks, Barclays, agreed to a $450 million settlement with U.S. and British officials after some of its traders and senior executives were found to have manipulated the rate for financial gain.
A number of other global financial institutions, including Citigroup and HSBC, are under investigation for their roles in the scandal. Analysts estimate that the combined fines and penalties for the financial services industry may exceed $20 billion.
Wheatley’s review will produce recommendations in late September about how the rate-setting process could be changed.
On Friday, the British regulator said the inquiry might lead to the use of actual trading data to set the daily benchmark rate.
Currently, a number of banks are polled each day about what their lending costs would be if they tapped the markets for financing. During the recent financial crisis, so-called interbank lending between firms was sharply curtailed, which led bank executives to submit incorrect data for Libor, according to regulatory filings.
“Libor is also intended to represent unsecured interbank borrowing costs for a range of maturities, but as this type of lending has severely declined since the financial crisis, submissions are more heavily reliant on judgment," Wheatley said.
The review will focus on potential criminal sanctions against individuals who manipulate the rate. U.S. and British authorities are considering the prosecution of traders implicated in the scandal, and European officials want to write new legislation to make the manipulation of Libor and other benchmark rates a criminal offense.
The overhaul of Libor will also involve increased governance of the rate-setting process, after authorities found deficiencies in how the system was overseen. In discussions dating back to 2008, U.S. and British central bankers had raised concerns with the British Bankers’ Association about how the rate was governed. In response, authorities forced the trade body to increase the auditing of banks’ Libor submissions from late 2008 to improve transparency.
“Any new governance framework should ensure that the compilation process itself is subject to a much greater degree of independence, transparency and accountability," Wheatley said Friday.