Watchdog in last-ditch bid to save Libor

Tim Wallace
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A MASSIVE shake-up of Libor will be announced today by the City’s watchdog, in an attempt to stop traders ever again manipulating the key interest rate for their own gain.

A new independent body will run the system, and bankers who break the rules could face criminal sanctions – including up to seven years in prison.

The reforms, being spearheaded by the Financial Services Authority’s (FSA) top regulator Martin Wheatley, will also force banks to use actual transactions data when contributing to Libor, rather than being allowed to estimate the correct level.

“The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust – it has torn the very fabric that our financial system is built on,” he will say this morning.

“Today we press the reset button. We need to get back to what this reference rate is supposed to do, restore integrity to a globally important benchmark, and make sure we get to a position where individuals act with integrity.”

In the past, the rate has been run by the British Bankers’ Association (BBA). Every day a group of banks tell the BBA their interbank lending rate for various currencies and various time periods, and the industry relies on this data to show both the strength of each bank taking part, and overall funding conditions.

But Wheatley believes the system had many flaws, most damagingly giving traders and banks as a whole incentives to lie in their submissions.

“The system had in-built conflicts of interest from the start – with traders’ bonuses dependent on the Libor rate, and no bank wanting to be seen as vulnerable in such a transparent system, too many people had a vested interest in gaming the system,” he will say.

Under his new system, individual banks’ entries will not be made public for three months, reducing the chance of a high rate making markets worry about the state of an institution.

To make sure they are all telling the truth, the submissions will be based on real transactions that will be checked by external auditors.

Staff responsible for Libor entries must be approved by the regulator, and if they break the rules they could be struck off, fined, or criminally prosecuted.

In times of crisis, some of the markets on which Libor figures are based would dry up completely, meaning there were no transactions and so the rates submitted could be complete guesses.

To reduce the risk of this happening, Wheatley will phase out Libor measurements for less frequently traded currencies like the Australian dollar, Canadian dollar and Danish Krone, and for time periods including four-, five-, seven-, eight-, 10- and 11-months, reducing the total number of reference rates from 150 to 20.

The government is believed to be supportive – it could add the proposals into the Financial Services Bill due to be presented to parliament this Autumn.

POLLY Peck tycoon Asil Nadir ­– jailed for 10 years last month for stealing £29m from the firm he founded – told an Old Bailey hearing yesterday that he was penniless. Nadir, who lived in Mayfair for two years prior to his trial, said he relied on family and friends’ generosity. The hearing has been adjourned to 31 October.