Wednesday, August 22, 2012

Does LIBOR Have a Future?

A discussion paper published on August 10, 2012 by a team commissioned by the UK Treasury's Chancellor of the Exchequer takes a look at the structure and governance of LIBOR and the corresponding criminal sanctions regime. This initial discussion paper identifies the failures within the current LIBOR processes, explores the options to strengthen LIBOR, considers whether LIBOR could or should be replaced by alternative benchmarks, and looks into whether the issues raised with respect to LIBOR are relevant to other benchmarks in financial and other markets.  Martin Wheatley, Managing Director of the UK Financial Services Authority and Chief Executive Designate of the Financial Conduct Authority (one of the successor organizations to the FSA) was directed to perform this review and report back to HM Treasury with recommendations.

The very public way in which these failings of the current LIBOR framework have been exposed, and the significant scrutiny that the framework has come under, will clearly act as a strong driver for reform. Given the weaknesses in the current system, it seems likely that changes to all three aspects of the framework – the calculation methodology, independent governance, and regulatory oversight and sanctions – need to be considered carefully. This discussion paper therefore proceeds with a working assumption that retaining the status quo with no change at all will not be a viable approach

Among its initial conclusions, the Wheatley Committee found that LIBOR has a number of significant weaknesses that have eroded its credibility as a benchmark and that retaining LIBOR unchanged in its current state is not a viable option, given the scale of identified weaknesses and the loss of credibility that it has suffered. The Wheatley Committee recommends that steps be taken to strengthen LIBOR to take account of these weaknesses, and also that alternative benchmarks be identified and evaluated to take on some or all of the roles that LIBOR currently performs in the market.

It seems certain that LIBOR as it is known and used now will be replaced in whole or in part by other benchmarks.  It remains to be seen what will step in to take its place, and what steps regulators and governments will take to ensure these new benchmarks are not subject to the same potential abuses.

The consultation period for this initial paper closes September 7, and the Wheatley Committee intends present its findings to the Chancellor of the Exchequer before the end of September.