Following the Wheatley Review, a 10-point plan has been published covering extensive and lasting reform of a broken system to restore the trust that has been lost. First and foremost, Wheatley concluded that Libor can be fixed through a comprehensive and far-reaching programme of reform. Although the current system is broken, it is not beyond repair, and it is up to regulators and market participants to work together towards a lasting and sustainable solution.
Libor is used in a vast number of financial transactions; with a value of at least $300 trillion. The deep entrenchment of Libor as a reference rate in financial markets, and the subsequent effect on those markets in the event of a disruption to the rate, mean that any case for replacement entirely would have to prove that Libor is:
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beyond repair;
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that a better alternative existed at this moment in time;
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and critically, that an immediate and smooth transition to that alternative could be made.
Wheatley concluded that none of these conditions have been met and that instead there is a clear case for comprehensively reforming Libor, rather than replacing it.
Secondly, he concluded that Libor submissions should be supported by relevant trade data and proper record keeping. Some degree of judgement will have to be retained, because even in the more liquid markets there is not enough daily data available to have a system in place that is entirely based on market transactions, particularly in times of stress. Much greater rigour and transparency must be introduced to the process of submission.
And third, Libor is a creation of the market, invented by the market for the market. It is clear that proper regulation and sanctions are needed and the FSA stands ready to provide that, should the government agree. But banks and market participants must play their part too.
Wheatley's recommendations combine both long-term and immediate changes. The three broad areas that these recommendations cover are:
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Regulation - Introducing a new regulatory structure for Libor, including criminal sanctions for those who attempt to manipulate it.
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Governance – Transferring the oversight and governance role from the British Bankers’ Association.
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The rate itself - A range of technical changes to make the system work better, including streamlining a lot of the currencies and maturities currently used.
This responsibility will be taken forward by the new Financial Conduct Authority – led by Wheatley – which will focus on making sure that financial services and markets function well, by promoting market integrity, consumer protection and effective competition.
Wheatley went on to cover why Libor was so important, what went wrong, and what was needed to restore confidence in Libor. In closing, he said that this regulatory foundation must serve as the last line of defence, behind an overhauled governance structure, with a new, independent body, backed by a clear code of conduct, with clear rules and procedures regarding submission.
"These changes will ensure that the market can once again have confidence in Libor going forward, and that the public both in Britain and abroad, are reassured that this problem will not happen again."
Press release including Wheatley Review Recommendations
See also Speech by Financial Secretary to the Treasury, Rt Hon Greg Clark MP; Wheatley Review Final Report
© FSA - Financial Services Authority
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