LONDON Britain's financial watchdog wants more banks to help set Libor, saying firms that do not volunteer to join panels that calculate the interest rate daily could be compelled to.
The Financial Services Authority wants to make it harder to rig Libor - the London interbank offered rate, a benchmark used in contracts worth an estimated $500 trillion worldwide.
Barclays was fined 290 million pounds ($467 million) in June by British and U.S. regulators for manipulating LIBOR. Peers such as RBS and UBS were expected to settle similar charges in coming weeks.
The fines imposed on Barclays led to banks pulling out of panels that set interest rates in places such as Hong Kong and Singapore as they grew reluctant to expose themselves to possible allegations of manipulation of reference rates that are used relatively infrequently.
Probes by regulators in several countries prompted a review by FSA managing director Martin Wheatley, which made recommendations in September to reform how Libor was set, governed and supervised.
At present, 11-18 banks contribute to setting Libor in each of the five main currencies - Libor has 150 variants, depending on currency and maturity.
The FSA said on Wednesday it wanted to have a minimum of 20 firms taking part in each currency and it would get powers to force banks to participate.
It set out how those recommendations would be implemented from March. The paper said the number of banks involved could be increased to discourage attempts to manipulate Libor.
"In some cases, we think it would be beneficial to the rate if firms considered voluntarily applying to submit to the Libor benchmark," the FSA said.
"Existing submitters might also review whether to join additional panels for any of the five currencies that are to be retained ... in which they do not currently participate."
Putting forward criteria for deciding which banks would be eligible to take part, the FSA said the top 30-40 institutions should contribute to Libor.
"We would expect to consult the market again in the event that we wish to enact the compulsion powers. We many not consult, however, if we felt we had to use the power in an emergency to introduce rules requiring submissions to maintain the integrity of Libor," the FSA said.
The number of variants will be cut drastically by early 2013 to focus on the more heavily traded ones.
The FSA said the reforms will be finalized by March and will come into effect at short notice.
Libor will be the only regulated benchmark in Britain at first, meaning submitters must comply with new rules to avoid abuses and conflicts of interest. Other benchmarks could be added later.
The British Bankers' Association is being shorn of its role as Libor administrator. The FSA said the BBA's replacement, now being selected by an independent panel, must pay an initial authorization fee of 25,000 pounds ($40,000) to the regulator.
The new administrator would then pay an annual fee of 385,000 pounds from the second year on. The FSA estimated it will cost the administrator 1.6 million pounds to get started with ongoing costs of up to 1 million pounds a year.
A bank taking part in submitting quotes to Libor under the new regime faces one-off costs of 1.6-2.5 million pounds, and on-going costs of 163,000-545,000 pounds, the FSA said.
The watchdog said it was difficult to quantify the benefits of the new rules in monetary terms but "given the global importance of Libor we believe the benefits outweigh the costs".
(Editing by Dan Lalor)