Introduction

On 17 October, HM Treasury published a ministerial statement confirming its full endorsement of the recommendations put forward in the Final Report of the Wheatley Review of LIBOR. 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. Its Final Report was published on 28 September.

This advisory provides a brief reminder of the Report's key recommendations and conclusions, and considers the implications of the UK Government's endorsement. For a more in-depth analysis of the findings and implications of the Report, please refer to our previous advisory, "LIBOR Reforms – The Wheatley Report".

The Wheatley Report

The Wheatley Report notes that its recommendations in respect of LIBOR reform are founded on three fundamental conclusions:

  1. that there is a clear case in favour of comprehensively reforming LIBOR, rather than replacing the benchmark;
  2. that actual transaction data should be used to support LIBOR submissions; and
  3. that market participants should continue to play a significant role in the production and oversight of LIBOR.

Resting on these three fundamental principles, the Wheatley Report proposes ten recommendations for the reform of LIBOR. Taking each of these recommendations briefly in turn.

Regulation of LIBOR

  1. The LIBOR submission process should be designated as a "regulated activity", thus bringing it within the statutory framework of regulation. Furthermore, the individuals having management responsibility for the submission process should be subject to the "approved persons " regime, so that the regulator will have disciplinary powers over them.

Institutional Reform

  1. The British Bankers Association (BBA) should cease to have any role in the setting of LIBOR and should transfer responsibility to a new administrator, which will also be responsible for the governance and oversight of the benchmark. The new administrator would be a private organisation, appointed by a tender process to be run by an independent committee set up by the regulatory authorities.
  2. The new administrator should perform specific obligations as part of its oversight of LIBOR, including monitoring and scrutinising rate submissions and undertaking periodic reviews of the effectiveness and credibility of the benchmark.

The rules governing LIBOR

  1. The Report sets out proposed LIBOR submission guidelines that should be observed by submitting banks with immediate effect. The guidelines provide a hierarchy of criteria to be assessed by submitters, with priority given to the explicit and clear use of actual transaction data to determine submissions. Notwithstanding its emphasis on the use of actual trade data, the Report does accept that a degree of subjectivity and expert judgement will be required in certain cases.
  2. In due course, the new LIBOR administrator should, as a priority, introduce a detailed Code of Conduct for rate-submitters, which should include: (i) guidelines for the explicit use of trade data in formulating submissions; (ii) requirements for appropriate systems and controls; (iii) record-keeping obligations; (iv) provision for the validation of submissions; (v) a requirement for reporting suspicious conduct; and (vi) a requirement for regular external audit of the submission process.

Immediate improvements to LIBOR

  1. The BBA should cease to publish interest rates for currencies and tenors which are too thinly traded to corroborate submissions. The Report does, however, recognise that a period of consultation and advance notice may be required before phased withdrawal of these rates.
  2. The BBA should only publish individual bank submissions three months after the dates concerned to reduce the incentive for submitters to attempt manipulation, in particular by limiting the potential for credit inferences to be drawn.
  3. A wider range of banks should participate in the LIBOR setting process, including, if necessary, through new powers of regulatory compulsion.
  4. Market participants using LIBOR should be encouraged to consider whether LIBOR is the most appropriate benchmark for the transactions that they undertake, and whether their contracts contain sufficient provisions covering the event of LIBOR ceasing to be available.

International co-ordination

  1. The UK should work closely with EU and other international authorities and contribute fully to the debate on the longer term use of LIBOR and other global benchmarks.

HM Treasury's Statement

HM Treasury has endorsed in full every one of the recommendations proposed by the Report. Furthermore, its statement makes clear that the Government intends to take any actions required to implement the recommendations without delay.

Whilst the statement does not deal with each of the recommendations individually, it does confirm some specific actions that will be taken in response to the Report. As widely expected, the Government will bring forward amendments to the Financial Services Bill, which is currently before Parliament, in order to give legislative force to certain of the Report's recommendations. If approved, such amendments would have the effect of bringing the submission of rates to benchmarks and the administration of such benchmarks within the scope of statutory regulation, with the power to regulate such activities being vested in the Financial Conduct Authority. Existing offences in respect of the making of misleading statements relating to investments, under s.397 of the Financial Services and Markets Act 2000, would also be extended to capture the making of misleading statements to manipulate a benchmark, such as LIBOR. The Financial Conduct Authority would have the lead role in both investigating offences and bringing prosecutions under the new regime and, in addition, would be given the power to make rules requiring banks to participate in the LIBOR setting process.

HM Treasury's response also confirms that, as advocated in the Report, the BBA should, in due course, relinquish its role in the setting and administration of LIBOR. Furthermore, its statement announces that an independent panel of experts, to be chaired by Baroness Hogg, will be established to identify its successor. Other urgent reforms, including the phased removal of thinly traded currencies and tenors, will be implemented by the BBA and, in time, by its successor body.

The Government also specifically affirms that the recommendation to consider the use of benchmarks in other financial and commodities markets will be taken forward through the relevant international bodies.

Conclusions

The Government's full endorsement of the recommendations of the Wheatley Report is perhaps unsurprising. However, the nature of the Government's whole-hearted endorsement and its commitment to implement the Report's recommendations without delay further demonstrates the current impetus for reform of LIBOR and the political will to take significant and prompt action for that purpose.

With the Government currently working towards implementation of the new regulatory system under the Financial Services Bill by early 2013, it may be assumed that wholesale reform of LIBOR is now an imminent development.