By Liam Vaughan: Every two months, representatives
from the world’s largest banks meet at an undisclosed location
to review the London interbank offered rate.
Who sits on the British Bankers’ Association’s Foreign
Exchange and Money Markets Committee, the body that governs the
benchmark for more than $300 trillion of securities worldwide,
is a secret. No minutes are published. The BBA won’t identify
any members, saying it wants to protect them from being lobbied,
and declined to make the chairman available for interview.
The group’s lack of transparency is symptomatic of a self-
regulated system that failed to stop traders around the world
manipulating the world’s most widely used benchmark interest
rate for profit. Martin Wheatley, the British regulator charged
with reviewing Libor after the scandal, is now weighing whether
to bring oversight under the control of regulators.
“Politically something has to fundamentally change in the
way that Libor is run,” said Owen Watkins, a former regulator
at the U.K. Financial Services Authority and now a lawyer at
Lewis Silkin LLP in London. “The obvious way to change it is to
have regulators more involved than they were in the past.”
The group has sole responsibility for all aspects of the
functioning and development of Libor, according to the BBA. Its
functions include the design of the benchmark, which banks sit
on the panels that determine the rate, and scrutiny of all rates
submitted.
‘Highly Experienced’
Members are “highly experienced market participants” who
are independent of the BBA “and any other organization,” the
website says. Still, all committee members act as “individuals
representing their firms,” the BBA says. The chairman is also
drawn from one of the banks that submit to the rates.
“Benchmark-setting is a process which affects the public
good in that it brings certainty to markets,” said Greg Ford, a
spokesman for Finance Watch, a Brussels-based public interest
lobby group. “For that reason it needs the highest forms of
governance and protection. Anonymity doesn’t fit that at all.
How can you control conflicts of interest when you don’t know
who you are dealing with?”
Spokesmen at Credit Suisse (CSGN) Group AG, Royal Bank of Scotland
Group Plc (RBS) and UBS AG (UBSN) declined to comment on whether they have
any representatives on the committee, or their identities.
Barclays Plc (BARC), Deutsche Bank AG, HSBC Holdings Plc (HSBA), Bank of
America Corp and Citigroup Inc. (C) didn’t reply to e-mails seeking
information on their involvement in the committee.
Transparency Lacking
“There is an apparent lack of transparency,” Wheatley
said in a discussion paper published Aug. 10. The scrutiny
provided by the BBA’s Foreign Exchange and Money Markets
committee “doesn’t appear to be sufficiently open and
transparent to provide the necessary degree of accountability to
firms and markets with a direct interest in being assured of the
integrity of Libor.”
The benchmark is determined by a daily poll carried out on
behalf of the BBA that asks banks to estimate how much it would
cost to borrow from each other for different periods and in
different currencies. At least a dozen firms are being probed
worldwide over allegations they manipulated the rate.
Dan Doctoroff, chief executive officer of Bloomberg LP,
proposed an alternative to Libor, dubbed the Bloomberg Interbank
Offered Rate, in a Wall Street Journal opinion piece this month.
Bloomberg LP is the parent of Bloomberg News.
The committee has so far failed to produce reforms that
convince regulators and to levy sanctions against banks that
have admitted to manipulating the rate. After the Bank for
International Settlements first raised concern Libor was open to
manipulation in 2008, the committee stepped up scrutiny of rate
submissions.
`Wholly Inadequate'
Bank of England Governor Mervyn King described the response
as “wholly inadequate” and ordered any reference to the
central bank to be removed from the BBA document explaining the
changes, according to correspondence between the bank and the
New York Federal Reserve released in July.
One power the committee did introduce was to grant itself
the right to remove any banks “unquestionably in breach of the
Libor definition or terms of reference,” according to the BBA.
It hasn’t exercised that power -- even after Barclays Plc
was fined a record 290 million pounds ($453.4 million) on June
27 for rigging the rates over more than four years. Barclays
sits on the panel for rates including U.S. dollar Libor,
Sterling Libor and Swiss Franc Libor.
“Libor panels are always kept under review,” BBA
spokesman Brian Mairs said in an e-mailed statement. “Following
the recent regulatory ruling at Barclays, the BBA and others are
working to ensure the integrity of the benchmark.”
Workable Rate
The committee may be reluctant to ban lenders, because that
would make it hard to construct a workable rate, said Finance
Watch’s Ford. The dozen banks still being probed are among the
biggest players in an illiquid interbank market, he said.
In Japan, regulators have suspended banks for lapses in
their rate-submission processes. In December, the Financial
Services Agency ordered UBS AG to suspend trading for a week in
derivatives tied to yen Libor and Euroyen Tibor, the Tokyo
Interbank Offered Rate for yen held overseas. The following
month, Citigroup’s Tokyo-based trading unit was banned from
dealing in securities tied to Libor and Tibor, the Tokyo
interbank offered rate, for two weeks.
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