By Kirstin Ridley
LONDON, July 9 The U.S. owner of the New York
Stock Exchange announced Tuesday it will take over the
running of Libor, the benchmark interest rate at the center of a
global rigging scandal, in a move that Britain's financial
regulator said would restore its integrity.
A central cog in the world financial system, Libor rates are
used as a reference for some $550 trillion in contracts ranging
from complex derivatives to everyday credit card bills. Trust in
the London interbank offered rate (Libor) was shaken by
revelations last year that traders had routinely manipulated it,
prompting an overhaul of the system by which it is calculated.
NYSE Euronext will take over Libor from the British Bankers'
Association (BBA) for a token 1 pound (US$1.50), according to a
source who declined to be identified because the contract
details are confidential. The BBA, a trade body, had since the
1980s administered the rate which reflects what banks say they
are charged to borrow by other banks.
The focus for NYSE Euronext will be on restoring credibility
and integrity to Libor and ensuring it remains one of the most
important global rates, another source who declined to be named
said, adding that since Libor underpinned the interest rate
trading market it was vital to the exchange's own banking and
London is not losing oversight of the benchmark that bears
its name because the rate will continue to be regulated for the
time being by Britain's Financial Conduct Authority (FCA).
Tuesday's decision to award the administration of Libor to
NYSE Euronext from early 2014 was taken by an advisory committee
appointed in October by the UK finance ministry to find a
successor to the BBA.
Martin Wheatley, chief executive of the FCA, which started
regulating Libor in April in response to public and political
outrage at the scandal, called the appointment "an important
step in enhancing the integrity of Libor."
He said NYSE Euronext should be able to make money from
administering the benchmark. "Nobody came to this with anything
other than a commercial proposition," Wheatley said. "The trend
will be for benchmarks to be transparent and regulated. They
(NYSE Euronext) will take the view that this is a growing
industry and it's broader than just Libor."
With uncertainty about the future regulation of Libor, and
given NYSE Euronext is being bought by U.S. peer
IntercontinentalExchange (ICE) for $8.2 billion, not
everyone was convinced the appointment was a good idea.
"We had a 'fox guarding the henhouse' issue here, and we
should learn from that," said Bart Chilton, a member of the U.S.
Commodity Futures Trading Commission (CFTC) regulator.
"I firmly believe that having a truly neutral third-party
administrator would be the best alternative, and I'm not sure
that an exchange is the proper choice," Chilton said.
NYSE Euronext did not say how it would address such
concerns, but one of the sources close to the situation said it
would involve "a very strong governance and oversight regime."
This would include an oversight committee and code of conduct
"to ensure there is no repeat of what we've seen in the last few
years," the source said.
"Exchanges and other firms are always looking for growth,
and you can say that there is potential for pricing and trading
any index, including Libor," said Tom Jordan, whose New
York-based firm Jordan & Jordan advises securities firms about
market data and compliance services.
British and U.S. regulators have so far fined three banks
-Barclays Plc, UBS AG and RBS - a
total of $2.6 billion and two men have been charged for
manipulating Libor and similar benchmark rates. But more banks
and individuals remain under investigation.
Thomson Reuters, parent of Reuters which has
calculated Libor and distributed the rates on behalf of the BBA
since 2005, had also expressed an interest in a role in running
Libor, one of the sources said.
Asked about its potential interest in running Libor, Thomson
Reuters issued a statement that said it "has worked closely with
the BBA, FCA and HMT (UK finance ministry) throughout the
process of reforming Libor and welcomes the appointment of the
"We will continue to support the calculation and
distribution of Libor during the transition period," the company
The FCA's Wheatley had first recommended changes to how the
benchmark was set, governed and supervised in September.
But Libor remains in flux.
The U.S. CFTC wants it scrapped and replaced with a
reference rate based on actual market transactions, while
Wheatley argues that a rapid transition to a transaction-only
rate is not possible.
Meanwhile, Brussels is also seeking to take on powers held
by national regulators. According to an EU law to be proposed
shortly, regulation of major benchmarks like Libor and oil
indexes - also at the centre of rigging allegations - could be
shifted from London to the Paris-based European Securities and
Markets Authority (ESMA).
In an effort to bridge the gap between British and U.S.
views, the international securities regulators will later this
month propose final principles on the governance of benchmarks,
which will be reflected in the upcoming EU draft law.
According to a document seen by Reuters, it will recommend
using market transactions but will allow for estimates when
markets are illiquid. Trading dried up between banks at the
height of the 2007-2008 credit crunch, making it difficult to
calculate accurate interbank rates.