Regulation  

Leave no stone unturned in effort to reform Libor

Yet progress between global regulators and other banks over potential fines for their parts in alleged Libor manipulation has been cumbersome. That slow pace of resolution merely emphasises the deficit of enforcement powers held by authorities and the need for swift action to bolster the regulatory and legislative framework.

To its credit, the UK government wasted little time responding to the recommendations of the Wheatley Review.

In late November, the Treasury published a consultation paper outlining the legislative amendments necessary to implement the Wheatley Review in three key areas. First, making the setting and administration of Libor regulated activities; second, introducing criminal sanctioning powers for misconduct in relation to benchmarks to allow the regulator to investigate and prosecute such behaviour; and third, making it possible for the government to bring additional benchmarks within the scope of regulation, although only Libor is presently in scope.

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The current absence of regulatory oversight over the setting and administration of Libor, and lack of enforcement powers, have undermined investor confidence and public trust. Legislative measures to close these gaps are therefore welcome and should help repair the credibility of Libor. For example, in a recent survey of investment professionals, 82 per cent of respondents supported giving regulators the powers to pursue criminal sanctions over instances of Libor manipulation.

Formal regulatory oversight, particularly with criminal sanctioning powers for the Financial Conduct Authority (which replaces the FSA in 2013), should provide a more credible deterrent to market abuse and will help to strengthen investor and consumer protection.These measures will also be complemented at the European level, where the European Parliament has been updating the EU’s market abuse legislation to define manipulation (actual or attempted) of benchmarks explicitly as a form of market abuse.

The third aspect of the Treasury’s paper – the possibility for bringing other benchmarks within the scope of regulation – dovetails with another initiative at the European level that examines the regulation of indices serving as benchmarks in financial contracts more generally. That initiative is currently under consideration following the recent completion of a public consultation exercise launched by the European Commission, which examined the purpose, production, and use of financial benchmarks generally, in addition to governance and transparency considerations associated with benchmarks. Although it is too early to tell whether the European Commission’s initiative will lead to a new directive or other legislative action, the UK government’s approach is prudent by allowing sufficient flexibility in UK legislation to widen the scope of regulation to other benchmarks if necessary.

Another international initiative that could affect the UK’s legislative and regulatory framework is the International Organization of Securities Commissions’ task force on financial market benchmarks. That task force, co-chaired by Martin Wheatley of the FSA and Gary Gensler of the US Commodity Futures Trading Commission, is developing global policy guidance and principles for benchmark-related activities, and will soon launch a public consultation on its proposals. Given the widespread adoption of Libor internationally, a global framework of key principles or best practices for internationally used benchmarks should help engender sound governance and oversight in all jurisdictions. On top of this initiative, the Bank for International Settlements, under the coordination of the Financial Stability Board, has agreed to set-up a group of senior officials to examine reference rates used in financial markets.