Martin Wheatley of the UK’s Financial Services Authority on Friday announced plans to overhaul Libor, which has been at the center of a rate-fixing scandal involving Barclays and other major banks. Wheatley called for significant changes in the way Libor is set, and encouraged reform of other commonly used benchmarks with similar weaknesses – something Risk Matters flagged weeks ago. Maybe Wheatley saw the post?
Careful readers of the Risk Matters blog will recall that as the scale of the Libor-manipulation scandal was coming to light, we suggested that other opaque price-
setting practices were ripe for reform too, for gold, municipal bonds and IPOs:
Yet the LIBOR rate-setting isn’t the only part of the financial market where transparency is lacking.
Gold is priced at daily “fixings” by a committee of five banks (one of which is Barclays). Prices for municipal bonds are set by dealers and are hard for investors to find anywhere. Pricing an IPO still relies on a secretive dance between investors and underwriters to determine demand for a company’s shares.
And that’s exactly what Martin Wheatley, author of the FSA report, suggested. According to the Wall Street Journal:
Martin Wheatley, managing director of the U.K.’s Financial Services Authority, said in a 92-page report on overhauling the London interbank offered rate, or Libor, that regulators should draw up a set of overarching principles to underpin the construction and calculation of all sorts of financial yardsticks used to determine the price of assets, the performance of indexes and the obligations due from different parties in a financial contract.
Some widely used benchmarks may be vulnerable to the same conflicts of interest and weak governance that led traders at Barclays and possibly other banks to try to manipulate Libor, a key interest rate linked to trillions of dollars of loans and contracts, Mr. Wheatley said. Libor is based on daily estimates from a group of banks of how much it would cost them to borrow from one another.
Mr. Wheatley’s report recommended “further work be undertaken by international organizations, benchmark sponsors, regulators and other relevant participants to ensure that other important benchmarks are appropriately robust and credible.” (emphasis added)
The FSA’s plan will reform the Libor rate-setting by tying it more closely to interbank loans, but its stops short using of market transactions. Still, it’s a welcome first step in repairing Libor and should open the way toward strengthening other benchmarks.
Oh yes, welcome, Mr Wheatley, and feel free to share our blog with your friends.