US bid to punish City over Libor

Tim Wallace
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Top Wall Street regulator wants benchmark rate scrapped in wake of rigging scandal

A TOP US official yesterday called for Libor to be scrapped, threatening to end the UK’s efforts to improve the key interbank lending rate and dealing a devastating blow to London’s role as a global financial centre.

Britain is reforming the way the discredited rate is set, establishing new controls to stop it being abused again in future and running a tendering process to decide which organisation would be best at running Libor.

But those efforts are harming financial stability, according to Gary Gensler from derivatives watchdog the Commodity Futures Trading Commission (CFTC) who wants the rate scrapped and replaced – potentially shifting power to the US over benchmarks and the trillions of dollars worth of contracts that rely on it.

The abuse of Libor by rogue staff at banks like Barclays, UBS and RBS has undermined confidence in the rate and reduced its usefulness, he said. And new liquidity rules mean there are few transactions on which the benchmark can be based.

“These benchmarks – referencing markets with insufficient transactions, particularly in longer tenors – undermine market integrity and threaten financial stability,” he told the City Week conference in London.

He added that market chaos in Cyprus had no impact on reported Libor levels, suggesting the benchmark was failing to reflect reality.

And efforts to improve the rate could do more harm than good, he warned.

“The financial system’s reliance on interest rate benchmarks, such as Libor and Euribor, leaves the system in a fragile state,” Gensler said.

“Continuing to support Libor in the name of stability may have the opposite effect. Using benchmarks that threaten market integrity may create more instability in the long run.”

Gensler’s comments fly in the face of the British effort to reform the rate and are not thought to be welcome at the Treasury.

The department declined to comment, but it is understood UK officials expect Libor will remain a vital benchmark in future.

“It is going to be used for a very long time to come,” said a source. “We’ve taken action to restore confidence in Libor. The tender is in process and Baroness Hogg is due to recommend a new administrator for the rate in the summer.”

And City watchdog boss Martin Wheatley questioned the end result of Gensler’s campaign to scrap Libor. “You can’t throw something away before you have an alternative.”