LONDON The U.S. owner of the New York Stock Exchange NYX.N 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 brokerage customers.
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) (ICE.N) 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 (BARC.L), UBS AG UBSN.VX and RBS (RBS.L) - 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 (TRI.TO), 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 new administrator."
"We will continue to support the calculation and distribution of Libor during the transition period," the company said.
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.
($1 = 0.6695 British pounds)
(Additional reporting by Steve Slater, Matt Scuffham and Clare Hutchison in London and Jed Horowitz in New York; Editing by Alexander Smith and Cynthia Osterman)