British Bankers Association bows out of role as Libor's chief arbiter

LONDON: Libor, or what was called the London Interbank Offer Rate, has long been a cornerstone of global finance. It is the basic benchmark interest rate for everything from personal loans to home mortgages to complex derivative and forex transactions that run into trillions, even in India.On Wednesday, the British Bankers Association, the body that since 1986 has been in charge of setting Libor, officially bowed out of its role as the chief arbiter of a global rate — marking the beginning of the end of Libor as we knew it. The British Bankers Association (BBS) was a step ahead of being stripped of its role by regulators, after a major Libor reform movement began a month ago.On Friday, Martin Wheatley,managing director of FSA, the UK's equivalent of Sebi, who was given charge ofcoming up with a reformed Libor, is expected to announce that from now on, Liborwill be set according to actual market trades instead of banker's estimates, andmanaged by regulators and not trade bodies like the BBS.The UKregulator has been under extreme pressure, both domestically andinternationally, after the spate of scandals about banks rigging Liborthroughout the noughties — a development that cost Bob Diamond, highprofile head of Barclays, his head. Barclays was fined a record £290million for rigging Libor.Over 12 major banks are underinternational scrutiny for systematically rigging their estimates of Libor ratesto help their own traders.US regulators have been most strident intheir calls for reform, and were the first to crack down on Barclays. Americanregulators have been calling for Libor to be immediately reformed, or abolished,and pursuing Libor-rigging with evangelical zeal.Libor is currentlyset by a survey of individual banks on a daily basis, where they are asked atwhat price they expect to borrow across some 10 currencies. Banks submit theirestimates (not actual borrowing rates) to the BBA, which then uses an averagingformula to set Libor. This is then used globally as the base rate for contracts.The system depended on a "gentleman's agreement" that respondents would notcheat. But banks have been accused of routinely manipulating their estimates— either setting it too low, or too high — to accommodate their owninterests. Euribor, the European interbank rate is also under scrutiny, but isunlikely to face severe reforms as its members are national banking associationsof member countries, and not individual banks.Under the new rules,it is expected that actual market trades in the daily interbank market —the rate at which banks can borrow and lend from each other in the overnightmarket, and therefore used as a benchmark floor borrowing rate across the world— will provide the data, and it will be overseen by a formal regulator.The UK parliament is working on legislation that will allow the changes. Oncechanges are put in place, market participants expect to take some time to seehow the new numbers pan out, and adjust to them gradually.The spateof scandals has not only cost a host of banks large chunks in fines, it has alsoirreparably tarnished the sanctity of Libor as a globally accepted benchmark.The FSA's moves to reform Libor was driven by the need to restore internationalconfidence in what is a London landmark.