The UK’s plan to reform the world’s most important lending rate will guide a global drive towards more transparent and reliable pricing for everything from home mortgages and gold to heating oil, regulators said on Friday.
Regulators in the US, Europe and Japan said that the recommendations from Martin Wheatley, who led the UK review, would provide a model for their own efforts to improve interbank lending rates, along with a host of other indices that are calculated using estimates from market participants rather than actual transactions. Such indices are used to price commodities as diverse as gasoline and gold.
Mr Wheatley, managing director of the UK Financial Services Authority, and Gary Gensler, a top US regulator, were already working together on rate-setting guidelines that will be issued in March by the International Organisation of Securities Commissions.
Iosco will also ask national regulators to examine whether the rate-setting process for important international pricing benchmarks meet its new standards. “It should be possible to develop a set of overarching principles that can be applied to all major benchmarks, to promote robustness and credibility across the markets,” Mr Wheatley said. “The global community wants to see problems tackled where they exist.”
The UK proposals are aimed at restoring public confidence in the London Interbank Offered Rate in the wake of a manipulation scandal that has snared more than a dozen institutions on three continents. Ordinary investors were outraged by the scale of misconduct revealed when Barclays paid £290m in penalties and admitted its employees sought to move the benchmark in order to make money on their trades.
Mr Gensler, chairman of the US Commodity Futures Trading Commission, described Mr Wheatley’s plan as “a really significant step”. “What we are doing through Iosco will build on this and ask some further questions,” he added.
Another CFTC commissioner, Scott O’Malia, said he had asked CFTC staff to examine more than 1,600 kinds of US contracts that depend on indices and benchmarks to see where improvements could be made.
Mr Wheatley’s recommendations seek to improve the transparency and reliability of an existing benchmark without disrupting the $350tn in outstanding contracts worldwide that it helps price, including millions of US home mortgages. Like Libor, many other indices could also be manipulated by the submission of misleading estimates, but cannot simply be thrown out because so many contracts depend on them.
Michel Barnier, the EU commissioner overseeing financial services, is also working on proposals to improve a range of benchmarks in the 27-nation bloc that he will unveil next year. In the meantime, Mr Wheatley’s reforms could provide a template for improving the European Interbank Offered Rate, the Brussels-based rate that has also been caught up in the scandal.
Andrea Enria, chairman of the European Banking Authority, said regulators will put out new guidelines for Euribor by the end of the year.
The Japanese Bankers Association, which uses a system modelled on Liborfor the Tokyo Interbank Offered Rate, will also use Mr Wheatley’s recommendations in its own ongoing review.
Additional reporting by Alex Barker in Brussels and Paul Davies in Hong Kong