UK BBA sees gradual Libor reform rather than "big bang"

LONDON, March 28 Tue Mar 27, 2012 7:01pm EDT

LONDON, March 28 (Reuters) - Britain's banking trade body ruled out on Wednesday a "big bang" reform of the Libor interest rate, saying it favoured gradual change, although rules may be tightened for contributing banks after allegations the global benchmark had been manipulated.

The British Bankers' Association put its London Interbank Offered Rate under review last month after allegations surfaced in 2008 that some contributing banks had rigged the rates to improve their credit quality during the credit crisis.

Mapping out on Wednesday how Libor could "evolve", the BBA said the review would include studying "a rigorous code of requirements for all contributors and strengthening the statistical underpinning of the contributions".

Libor is used as a reference for $350 trillion in derivatives market securities, while $10 trillion in loans for everything from mortgages to companies with shaky credit histories are also pegged to it.

With so many contracts all over the world linked to Libor, BBA Chief Executive Angela Knight said change had to be gradual.

"It will take place on a sensible and reasonable timetable. It's all about evolution, confidence and no fireworks," Knight told Reuters. "If you went for a big bang change, you have big market instability."

The British Financial Services Authority, U.S. Securities and Trading Commission, European Commission, the U.S. Department of Justice and the Japanese Financial Services Agency have approached banks around the world to investigate their involvement in determining Libor rates.

European banks including Barclays, UBS, Deutsche Bank Lloyds Banking Group and HSBC have been named as defendants in a variety of class action complaints filed in the United States.

The investigations are examining whether banks mis-reported the rate at artificially low levels for years, either to project an illusion of strength in credit markets or to cash in on bets struck by their own traders on the direction of Libor.

Under the review, a steering group of users and contributing banks will also consider which other financial instruments should be included for defining the rate.

Regulatory changes, such as the U.S. Volcker rule barring proprietary trading at American deposit-taking banks and British plans for bigger capital buffers for retail lenders, could affect availability of instruments currently being used.

The Bank of England, Britain's Treasury and the UK FSA are "engaged with the initiative and will be kept fully informed throughout the process", the BBA said in a statement.

Knight said the UK authorities were expected to relay information about the consultation to their international peers.

Between 7 and 18 banks contribute rates for each currency, which are collected by Thomson Reuters. The company trims off the top and bottom quartiles and averages the rest to produce Libor.

"This is not a backward-looking consultation and does not touch on any investigations that have been taking place in any way. This is a forward-looking review," Knight said.

The CME Group, a U.S. derivatives exchange, said it remained committed to working with the BBA and others to make Libor "the most robust short-term interest rate index available".

The London Money Market Association said it was important that all money market participants had a choice of benchmarks which should be developed to reflect the changes in markets.

Thomson Reuters said it would continue to support the BBA and the financial community in the calculation and distribution of Libor.