On 8 November, the British Bankers Association (BBA) issued a consultation paper seeking feedback in relation to proposals for the implementation of certain recommendations of the Final Report of the Wheatley Review of LIBOR (the Report). The Wheatley Review was set up by HM Treasury earlier this year to review and consider reform in respect of the framework for the setting and administration of LIBOR. The BBA's consultation paper puts forward a timetable for implementation of the sixth recommendation in the Report: namely, that the BBA should cease the compilation and publication of LIBOR for those currencies and maturities for which there is insufficient trade data to corroborate panel bank submissions.
This advisory provides a brief reminder of the key recommendations made in the Report and outlines the proposals made by the BBA in response to the sixth recommendation. For a more in-depth analysis of the findings and implications of the Report, please see our previous advisory, "LIBOR Reforms – The Wheatley Report". It may be noted that the Report has been fully endorsed by the UK Government, which expects the reforms to be implemented without delay (see our previous advisory, LIBOR Reforms – UK Government endorses Wheatley Report).
The Wheatley Report
The Wheatley Report put forward a number of recommendations for the reform of LIBOR. Taking each of these recommendations briefly in turn:
Regulation of LIBOR
- The LIBOR submission process should be designated as a "regulated activity", subject to statutory regulation by the new Financial Conduct Authority.
- The BBA should transfer responsibility for the setting of LIBOR to a new administrator, to be appointed by a tender process run by an independent committee set up by the regulatory authorities.
- The new administrator should perform specific obligations as part of its oversight of LIBOR, including scrutiny of rate submissions by panel banks and undertaking regular reviews of the effectiveness and credibility of the benchmark.
- The Report sets out submission guidelines to be observed by LIBOR panel banks with immediate effect. The guidelines provide a hierarchy of criteria to be assessed by rate submitters, with priority given to the explicit and clear use of actual transaction data to determine submissions.
- In due course, the new LIBOR administrator should, as a priority, introduce a detailed Code of Conduct for rate-setters including, amongst other things, guidelines for submissions, requirements for appropriate systems and controls, record-keeping obligations and a requirement for external audit of the submission process.
Immediate improvements to LIBOR
- The BBA should in due course cease to publish interest rates for currencies and tenors which are too thinly traded to allow for the use of actual transaction data.
- The BBA should only publish individual panel bank submissions three months after the dates concerned. This would reduce the incentive for panel banks to manipulate their submissions in order to influence their perceived credit standing.
- The Financial Conduct Authority should be given a reserve power to compel banks to submit rates for LIBOR purposes, in order to widen the range of banks participating in the LIBOR setting process.
- Market participants using LIBOR should be encouraged both to consider whether LIBOR is the most appropriate benchmark for their needs and to ensure that their contracts have sufficient contingency provisions covering the non-availability of LIBOR for any reason.
- The UK, EU and other international authorities should work closely together to establish clear principles for global benchmarks.
The BBA's Proposals
The BBA's consultation paper deals specifically with the sixth recommendation in the Report and proposes a phased removal from the LIBOR compilation process of those currencies and tenors which cannot be supported by sufficient, underlying trade data. The paper envisages this process being completed by the end of March 2013, as follows:
- By the end of January 2013, the removal of the following maturities from all currencies in the current LIBOR framework: 2 week, 2 month, 4 month, 5 month, 7 month, 8 month, 9 month, 10 month, 11 month.
- By the end of February 2013, the discontinuance of all remaining maturities pertaining to the Australian Dollar and the New Zealand Dollar.
- By the end of March 2013, the discontinuance of all rates relating to the Canadian Dollar, the Danish Krone and the Swedish Krona.
Although not specifically discussed in the Report itself, the BBA's consultation paper also proposes discontinuing the publication of the GBP Repo (repurchase agreement) benchmark at the end of December 2012 on the grounds of lack of use in financial markets.
Conclusions and Recommendations
The publication of the BBA's consultation paper demonstrates the urgency with which reform in this area is to be taken forward. As a consultation paper, the proposals and associated timetables are clearly subject to revision in the light of market reaction. Nevertheless, it must be likely that the BBA will seek to undertake reform in this area prior to the transfer of its responsibility for LIBOR to a new, independently appointed administrator. The consultation period extends to 8 December 2012, with the BBA intending to publish its feedback statement before the end of 2012.
Financial market participants will clearly need to consider whether the prospective changes to the LIBOR processes may have an impact on their existing contracts. For example, do their contracts involving the major currencies employ any of the less commonly-used maturities? Do any such contracts reference any of the more marginal currencies that are to be dropped from the process altogether? In each case, it will be necessary to consider whether any "fallback" provisions applicable in the absence of LIBOR quotations will operate effectively. In some cases, it may be necessary to consider an approach to the counterparty to renegotiate the relevant terms of the contract or to clarify any possible ambiguities.