This flurry of regulatory initiatives at the European and global levels highlights both the zeal for reform and the desirability of achieving some level of international co-ordination. These are important steps to ensure that similar benchmarks carry similar standards of governance, transparency and oversight wherever they are used.
Where does all this leave the Wheatley Review? In addition to recommendations for strengthening regulatory oversight and sanctioning powers, and calling for international principles for global benchmarks, the Wheatley Review has called for banks’ Libor submissions to be supported by actual transaction data wherever possible, a new code of conduct over submissions to establish standards over the rate-setting process, and a new administrator who will take over from the British Bankers’ Association. Other measures included limiting the production of Libor to only those currencies and tenors where there is a liquid underlying market and giving the regulator reserve powers to compel banks to participate in the Libor submission process, in order to ensure a sufficiently large panel and reduce the influence of any one bank in the calculation of the benchmark.
Of all these measures, greater transparency over the calculation and production of benchmarks and indices such as Libor, particularly where such indices are based on subjective or judgmental inputs, is a key element to uphold market integrity. Greater transparency underscores market discipline and helps mitigate conflicts of interest. To that end, the recommendation for individual banks’ Libor submissions to be corroborated by actual transaction data is a key step. But where estimates are used (such as where transaction data is not available), it would also be beneficial if the basis of those estimates were also made transparent, in order to provide the necessary market discipline.
Other important measures to ensure the integrity of benchmarks should include robust internal controls, policies, and procedures surrounding the assimilation and contribution of data for the calculation of benchmarks; adequate management reporting and supervision over the provision of inputs; conflicts management policies; and appropriate regulatory oversight.
The government has endorsed each of the recommendations in the Wheatley Review. In addition to the Treasury paper, the FSA published a consultation at the start of December examining how other aspects of the Wheatley Review should be implemented, focusing on the role of benchmark administrators, submissions to benchmarks, and broader participation in Libor such as the potential to require firms to participate. The consultation builds off the premise established by the Wheatley Review that the setting of Libor should remain an industry-led activity, but the submission to, and administration of, the rate should be regulated.