BBA Ready to Move Away from Libor Role

Published September 25, 2012

| Reuters

The British banking lobby responsible for setting the Libor interbank borrowing rate said it was happy to hand over the task to regulators, days ahead of an expected UK proposal to take tighter control of the scandal-tainted benchmark.

Martin Wheatley, a top UK regulator, is expected to propose stripping the British Bankers' Association of its supervisory role in setting the hugely influential benchmark, in plans due to be presented on Friday.

"If Mr Wheatley's recommendations include a change of responsibility for Libor, the BBA will support that," the BBA said in a brief statement on Tuesday.

Libor - or the London Interbank Offered Rate - underpins global trade, but has been engulfed in controversy since Barclays was fined a record 290 million pounds ($471.38 million) in June for fixing it in the past.

The rate is based on banks' assessments of what they expect to be charged rather than measuring actual lending rates. The process is not supervised by financial regulators, and is now widely criticised for being insufficiently strict.

The Wheatley review, due out on Friday, is expected to propose anchoring Libor interest rates to real transactions, rather than rates at which panel banks believe they could borrow cash from their peers on an unsecured basis.

Libor has been criticised ever since the credit crisis in 2008, when interbank lending dried up, forcing banks to submit rates that were an estimate rather than a gauge of real deals, and allowing them to keep it artificially low.

But even before the credit crisis, fixing the rate allowed derivative traders to make gains, enabling them to know where the prices of complex financial instruments such as interest rate swaps were heading.

The BBA took control of Libor in 1986, and now covers a suite of 150 rates in different currencies and maturities, forming the basis for pricing contracts worth $350 trillion globally, from home loans to credit cards.

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission - one of the bodies to have fined Barclays - said on Monday Libor should be replaced or changed, suggesting it was based in "actual, observable market transactions."

Thomson Reuters, parent company of Reuters News, calculates and distributes Libor rates for the BBA.

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