Barclays’ US Deal Rewrites Libor Process

Barclays’ settlement with US regulators over the rigging of Libor is likely to have far-reaching implications for how benchmark interest rates are set in the future.

Bob Diamond
Bob Diamond

Under the terms of the pact with the US’ Commodity Futures Trading Commission, Barclays agreed to a six-pronged plan to “encourage” benchmark publishers, such as the British Bankers' Association, to improve the rate-setting process by increasing transparency and creating rigorous methodologies to determine submissions.

The pact is unusual because it requires Barclays to not only beef up its internal compliance systems but to take on a role as an advocate for increased oversight for the industry.

“We’re going to use every tool we can, whether it’s enforcement tools or rule-writing tools to try to benefit the American public and make sure markets are clean of fraud and manipulation,” said Gary Gensler, chairman of the CFTC.

Martin Wheatley, the UK regulator who has been asked by the UK government to lead a review of the legal framework for Libor and other rates, said his group would consider the CFTC’s demands. The BBA is conducting its own review and a person familiar with the progress said the settlement demands were “quite sensible” and could provide a template for reform.

The deal is the latest example of the controversial practice of using enforcement pacts as a road map to change compliance.

In the 2003 global Wall Street research settlement, US authorities imposed analyst independence and disclosure requirements on a dozen Wall Street investment banks as part of the deal.

In addition to the advocacy role, Barclays is required to undertake changes to its compliance, including basing its submissions on transactions, creating firewalls to separate rate submitters from traders, and annual audits of its rate-setting process by a third party.

While the settlement does not bind the BBA, which has sponsored Libor since the 1980s, it will add pressure to the bank-run association to put teeth into any revisions it makes to address the now untrusted system uncovered by the investigation, which has ensnared 20 banks and inter-broker dealers.

Currently banks base submissions on the cost of unsecured borrowing. Barclays admitted to submitting artificially low bids to improve its reputation and altering other submissions to benefit derivatives positions.

Regulators have grown frustrated with the BBA for failing to act quickly once questions about the veracity of the rate-setting process were initially raised in 2007 news articles. Then, the BBA reviewed its process and issued guidance.

The CFTC settlement papers allege that in 2008 a senior Barclays manager told a BBA representative that it had not submitted accurately, “We’re clean, but we’re dirty-clean.” The BBA representative allegedly said: “No one’s clean-clean.”

In March, under pressure from the growing investigation, the BBA launched a full review of its practices.

Mr Wheatley, of the Financial Services Authority, said he expects to finish his review by autumn, in time for the government to incorporate any recommended changes into the financial regulation reform bill currently moving through Parliament.