Regulatory Watch: Basel Committee Nods to Wheatley on Libor Reform

September 10, 2012

Basel’s Economic Consultative Committee concludes that it’ll wait to read Martin Wheatley’s Libor investigation. 

Fri Reg and Accting - Law BooksNot that much was expected from the Bank for International Settlements’ Economic Consultative Committee (ECC) over the weekend on its London Interbank Offered Rate (Libor) meeting, but it does smack of a United Nations proceeding where a committee often vows to look as hard as possible at a problem and when finished, wanly condemns, “in the strongest terms possible,” said problem. You can bet that issue will cease immediately!

On Sunday the ECC, a group comprised of thirty central bank governors (that are also members of the BIS’s board), including the central bank governors from India and Brazil, met to examine the so called Wheatley Report or the “Independent Review into Libor discussion paper.” Back in early August, Martin Wheatley, the head of an independent review set up by the British Government to look into Libor, released a paper setting out proposals for reforming the framework “for setting and governing Libor.“ That paper sought feedback from all stakeholders over a four week period, which ended recently. The feedback wanted to learn:

  • the role that Libor play in financial markets;
  • the flaws in the current structure of setting Libor, its governance  and oversight; and
  • a range of options for reform, including the issue of transition.

After its meeting Sunday, the ECC, led by Bank of England Governor Mervyn King, released a terse but mostly vanilla statement saying they cannot wait to read the Wheatley Report. “The BIS governors look forward with great interest to the recommendations of the [UK] Wheatley Libor Review, and to the reports of other official groups examining reference rates used in financial markets.” After this, the ECC will set up a group of senior officials “to take forward examination of these issues, and to consult with the market in order to provide input into the wider official debate coordinated by the Financial Stability Board.”

Many regulators, including Fed Chairman Ben Bernanke suggest switching from Libor to a market-based indicator, like the Global Collateral Finance (GCF) Repo Index. This could happen within five years, according to a Bloomberg survey. “A key interest rate for more than $500 trillion of securities worldwide will be replaced by a benchmark subject to greater government control,” Bloomberg reports. “Forty-four percent of those responding to a quarterly Bloomberg Global Poll said the London interbank offered rate, known as Libor, will be supplanted by a more regulated model within five years. Thirty-four percent predicted the rate will continue to be set by banks in the current fashion, while 22 percent said they didn’t know.”

Five years might be just fine. According to a report in the Financial Times, a fast switch would be disastrous for the $300tn in existing debt and derivative contracts based on the interbank lending benchmarks. “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, told the FT. “There is a lot outstanding and goes on and on for years and years.”

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