UK FSA’s Wheatley: Libor reform `must rebuild integrity

Martin Wheatley of the UK’s Financial Services Authority discusses his plans to reform the Libor rate with Maryam Nemazee on Bloomberg TV’s The Pulse.

Nemazee: I know that you said in this review that Libor is not fit the purpose; it needs to be changed. Many would agree with that. Does it look increasingly likely that we’re going to move towards a system of rate setting that is based on actual trades?

Wheatley: That’s certainly one of the options. What we’ve had is a concept of a rate at which banks will lend to each other but it was based on people’s judgement – what rate might people lend to each other at. In the last five years, frankly in the crisis, banks have not been lending enough to each other so you’ve had the difficulty that there are no actual trades to base it on. Now, that’s true of some of the fringe currencies, some of the smaller currencies, but in the core currencies, it’s still a pretty liquid market so I think we could take some of the judgment out and make it, in a sense, a more scientific process.

Nemazee: What are the complications or risks in doing that? Even with actual trades, you could get problems when the volumes of transactions are quite low. Could you still end up with a system that, to an extent, is relying a little bit on predicted rates?

Wheatley: Yes, I think so. You could end up with a system that still has judgment in it. But one of the other changes that we think we need to make is that, at the moment, this system is completely unregulated. There is no code of conduct in the banks, there is no approved regime for the people who are submitting and we, as a regulator, don’t have any sort of hold over the rate process. Whatever else happens, there needs to be some regulatory framework that sits around what has become absolutely a globally important benchmark.

Nemazee: Many would argue that the Libor scandal has exposed the weaknesses, or at least the inadequacies you could say, of the FSA. Why did it have to take a crisis like this to get the regulators to look more closely at Libor?

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