13 May 2013

Bloomberg: Wheatley seeks dual-track Libor as Gensler says replace rate

Martin Wheatley said the Libor should eventually be replaced with a transaction-based benchmark using a dual-track system. The tarnished benchmark, based on a daily survey of panel banks, should run in parallel with a transaction-based rate until a full overhaul of the system can be enacted.

Wheatley’s proposals contrast with Gary Gensler, the chairman of the US Commodity Futures Trading Commission, who said in a speech in London last month that interest-rate benchmarks such as Libor and Euribor are “unsustainable in the long run” and need to be replaced with rates that are based on real data.

Wheatley has said the market should dictate how much Libor is used in the future. The benchmark could be replaced with the parallel rate system as soon as next year, Wheatley said.

Gensler and Wheatley are leading a panel on behalf of the International Organisation of Securities Commissions into how global benchmarks can be strengthened. In a report last month, the panel said market benchmarks should be based on data from actual trades in a bid to restore credibility. They are also pushing for banks involved in benchmark setting to sign up to a code of conduct as part of a drive to make the process more robust.

The European Union, which is also investigating benchmark-rigging, will propose tougher regulation of the rates. Michel Barnier, the EU’s financial services chief, said in an e-mail today that “to the greatest extent possible”, the market should use indexes that are based on real transactions. Barnier said the use of estimates in benchmarks shouldn’t be outlawed entirely because of the need to allow for situations where there is a lack of real transaction data and also because such a move would affect many existing contracts.

The plans would “bring about more transparency, reduce conflicts of interest, and ensure that benchmarks are representative”, Barnier said. The new rules will be backed by fines, and will be in line with international standards prepared by market regulators, he said.

Regulatory oversight of Libor was handed to Wheatley’s FCA about six months after he proposed wide-ranging changes to the benchmark interest rate in September. The so-called Wheatley Review recommended scrapping more than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly and creating a code of conduct for lenders contributing to the rate.

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