| LONDON, Sept 20
LONDON, Sept 20 Libor, the interest rate at the
centre of an international rate-rigging investigation, must not
be scrapped hastily and any shift to alternatives should be made
gradually to avoid market disruption, a global derivatives
industry body said on Thursday.
Reform of the London interbank offered rate is inevitable
after Barclays and Royal Bank of Scotland (RBS)
were hauled before British and U.S. regulators. Barclays was
fined a record $450 million in June for attempted manipulation
of the rate and RBS is expected to be the next bank to settle.
Britain's Financial Services Authority is publishing its
recommendations for legal changes to Libor on Sept. 28.
However, the prospect of changes to a benchmark used as a
basis for pricing $350 trillion of products from home loans to
credit cards has alarmed the derivatives market, a major user of
the rate for its complex financial products.
Stephen O'Connor, chairman of the International Swaps and
Derivatives Association (ISDA), said that Libor remains hugely
relevant economically and is necessary for the proper
functioning of the off-exchange derivatives market.
Replicating Libor across derivatives would be a very large
and difficult task, O'Connor told the ISDA's annual conference.
"Libor must continue to be published," said O'Connor, who is
also managing director of Morgan Stanley.
The authorities should encourage banks to continue to
participate in setting Libor in the short and medium term until
a longer-term solution is in place, O'Connor added.
Libor is compiled by a panel of banks submitting quotes for
the interest rate at which they believe they could borrow from
Reform of Libor governance and setting was needed, O'Connor
acknowledged, but he said that the transition of existing
contracts to a new regime must be very carefully planned and
"There are limits to the amount of change that can be
accommodated," he said.
Hasty changes might see market participants claiming that
the nature of their contracts are different to what was
originally intended, which could spark disruptive legal issues.