Questions as to whether criminal sanctions for manipulating the
London Interbank Offered Rate (Libor) will have retrospective
effect have dominated the market reaction to this
mornings release of the Wheatley Libor
Reviews final report.
While its clear that those found guilty in the future can
be prosecuted, there seems greater interest in whether the
penalties can be applied to the banks at the centre of the
Other key changes, as outlined in Martin Wheatleys speech, include: an actual trades-based system;
replacement of the British Bankers Association (BBA) with
a new independent overseer; and people submitting quotes to be
approved by the Financial Services Authority (FSA). But
criminalising manipulation, and attempted manipulation, has
sparked the most interest.
It has always been clear that criminal sanctions should
apply to this sort of disreputable behaviour, said
Stephen Gilchrist of Saunders Law.
But a London partner told IFLR today that
its relatively difficult to make criminal sanctions
Answering questions from the audience this morning, Wheatley
confirmed that the criminal sanctions regime for manipulation
would relate specifically to Libor and not extend to other
He noted that at the European level via the European
Market Abuse Regulation there would be a broad benchmark
test. If we need to broaden it [Libor rules] out later,
then we will do, he said. But this would be a second
The Bank of England governor Mervyn King has welcomed the reports
findings, and has urged for the reforms to be introduced as
quickly as possible.
Larger bank panel
Under the new Libor-setting process, more banks will be
encouraged to submit rates.
In the Q&A session this morning, an audience member
cautioned that Libor isnt supposed to represent a market
average, but rather represent the rate of the largest bank
He went on to say that it must be clear, to the new overseer,
what criteria a bank must satisfy to be asked to submit a
quote. He said that contributions from a large number of weaker
banks would change the nature of Libor.
The possibility of compelling banks to participate in the
process is also somewhat of a shift in regulatory
We are used to seeing banks permission to engage in
certain activities removed, but not compelling them to take on
certain activities, said the London partner.
For crisis and short-term intervention its not
unheard of for regulators to ask banks to become involved to
assist them, but this is quite different, they
Importantly, the Charter of Fundamental Rights of the EU
includes a right that grants the freedom to conduct a business.
Whether requiring a bank to make Libor submissions goes against
this right is not clear, however it is something lawyers have
began thinking about.
As IFLR reported in July, moving
to an actual trades-based system means benchmark rates can be
set for only the most liquid indices. This morning Wheatley
announced that Libors existing 150 rates would be
whittled down to 20. The 130 rates being scrapped are those for
the Australian, Canadian and New Zealand dollars, and the
Swedish and Danish Krone.
Certain maturities will be phased out as well, including the
four, five, seven, eight, 10 and 11 month rates.
A practical concern that has permeated the Libor debate is what
a reformed reference rate would mean for existing contracts. Up
to $300 trillion of swaps contracts use the benchmark rate, and
significant changes created significant possibilities for
Legal advice was taken on the possibility of contract
frustration, and whether the benchmarks core definition
could change without creating events of frustration and market
I urge you to look at your swaps contracts, they are
surprisingly diverse as to what the rate is, Wheatley
said, responding to questions from the audience. He noted that
sometimes BBA is referenced, sometimes the Libor website is
referenced, and so forth.
In this regard, he noted the importance of not changing the
The London partner told IFLR that the impact
on existing contracts is likely to be greater than Wheatley
Wheatley said despite significant efforts, it was difficult to
obtain data from the market about all Libor rates based on
currencies and tenors that will be phased out. It means he is
not aware of the number of contracts linked to all the indices
that cannot be supported by real trade data.
Addressing the prospect of litigation between swaps parties, he
said: We are looking very hard to ensure that wont
be a feature of this transition.
Given the preliminary stage of establishing the new Libor
regime, Wheatley said it was difficult to describe the scale or
exact characteristics of the new agency. But it is clear that
it will have a level of independence from banks submitting.
Management of conflicts of interest is one thing, but the
avoidance is probably better, he said in response to an
Wheatley doesnt expect the new oversight body to be
created solely for the purpose of creating and commercialising
the product, rather it will be an existing one.
He made clear that choosing the new oversight body would not be
a commercial tender process. Our selection process will
look very carefully at governance, independence and
credibility, he said.
Guidelines will be published regarding the overseers
governance structure, the basics of which are contained in the
When asked why the FSA, or its replacement the Financial
Conduct Authority, could not be the overseer, Wheatley
responded: We are not a market operator. We are a
regulator, our role is to set rules and supervise those
He said the day-to-day, nitty gritty tasks required
are better suited for a market operator rather than
for full details of the Wheatley Review
See more of IFLRs Libor
US banks fight back over Libor investigations http://www.iflr.com/Article/3083729/Search/Results/US-US-banks-fight-back-over-Libor-accusations.html?PageId=201716&Keywords=libor&OrderType=0
How to make Libor work http://www.iflr.com/Article/3081594/Search/Results/How-to-make-Libor-work.html?PageId=201716&Keywords=libor&OrderType=0
How to reform Libor http://www.iflr.com/Article/3062640/Search/Results/How-to-fix-Libor.html?PageId=201716&Keywords=libor&OrderType=0
Opinion: Why Wheatleys Libor review will be a
What TSC Libor report means for Londons
Afma: what Libor can learn from Australias
Morgan Stanley: BoE must replace BBA on Libor http://www.iflr.com/Article/3066813/Search/Results/Morgan-Stanley-BoE-must-replace-BBA-on-Libor.html?PageId=201716&Keywords=libor&OrderType=0&PageMove=1
Libor alternatives analysed http://www.iflr.com/Article/3058468/Search/Results/Barclays-rate-fixing-scandal-Libor-alternatives-analysed.html?PageId=201716&Keywords=libor&OrderType=0&PageMove=1
Libor probe proves banks too big for UK http://www.iflr.com/Article/3065578/Search/Results/Libor-probe-proves-banks-too-big-for-UK.html?PageId=201716&Keywords=libor&OrderType=0&PageMove=1