10 September 2012

FT: Fast Libor reform 'risks causing chaos'

In submissions to a UK government consultation on Libor and other benchmarks, many corporate and investor users of Libor warned against the impact on outstanding contracts of moving too far, too fast.

“If somebody comes up with something better, people can migrate to that, but to do it in anything other than a number of years, risks disruption”, said John Grout, of the Association of Corporate Treasurers. “There is a lot outstanding and it goes on and on for years and years.”

Libor reform is considered critical to restoring faith in the London markets after revelations that Barclays and up to a dozen other banks tried to manipulate interbank lending rates. The allegations have called into question the current system, which relies on panels of banks to provide daily estimates of the rates at which they can borrow in 10 currencies and for 15 time periods. The government-sponsored review is being led by Martin Wheatley, a managing director of the Financial Services Authority who said this summer that the existing structure and governance, which is outside the regulatory ambit, is “no longer fit for purpose”.

The International Swaps and Derivatives Association, which represents both market makers and buyers, said actual transactions are few and far between for longer-dated rates, including the six month rates that are the basis for up to 40 per cent of all Libor based contracts.

The IMA is also concerned that Mr Wheatley’s review will lead to government oversight of a much wider range of benchmarks, potentially limiting the ability of investment managers to create new indices for particular clients.

Mr Wheatley expects to bring out formal recommendations by the end of the month.

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