London - Arabstoday
Twenty-six years after helping to design the London interbank offered rate, Britain’s bank lobbyists are distancing themselves from their creation amid regulatory investigations and lawsuits. The British Bankers’ Association, the century-old lobby group that oversees the rate, last week deleted references from its website referring to its role in setting Libor. This week, it met regulators and bank executives to review the future of the benchmark. Under one option, the Bank of England’s proposed Prudential Regulation Authority would take responsibility for policing the rate, said a person with knowledge of the talks who asked to remain anonymous because discussions are private. The BBA says it isn’t seeking to cede oversight to the regulator. Libor, the basis for $360 trillion of securities worldwide, has transformed from a talisman of London’s influence in financial markets to an albatross for the industry. Regulators worldwide are investigating whether banks routinely lied about their true borrowing costs to avoid the perception they faced difficulty raising funds and traders rigged submissions to benefit their own wagers on derivatives linked to the rate. The probes have called into question whether banks can be trusted to set Libor with only minimal regulatory oversight. “I don’t think Libor can continue to be something which is policed and monitored by the banks,” Terry Smith, chief executive officer of interdealer broker Tullett Prebon Plc, said in a telephone interview. “There’s been too much of a breakdown in trust for that.” U.S. Criminal Probe The U.S. is conducting a criminal investigation into suspected manipulation of benchmark rates including Libor, the Justice Department said in a letter to a federal judge that was made public yesterday. The Feb. 27 letter is the first public acknowledgment by the department of the criminal probe. Libor is generated through a daily survey of firms conducted on behalf of the BBA by Thomson Reuters Corp. (TRI) in which banks are asked how much it would cost them to borrow from one another for 15 different time periods, from overnight to one year. A predetermined number of quotes are excluded and those left are averaged and published for individual currencies before noon. Representatives from lenders, the BBA, the Bank of England, the Treasury and the Financial Services Authority met on March 5 to discuss the role of regulators in setting the benchmark. Spokesmen for the FSA and Bank of England declined to comment. Discussing Options “The intention of contributors and the BBA is to engage in a sensible and structured discussion on options for developing Libor for a changing environment,” the London-based BBA said in an e-mailed statement. “We and the contributors intend to undertake this work in a manner that is conducive to market confidence.” If the BBA is deemed by authorities to be unable to effectively police Libor, responsibility could pass to the Bank of England’s Prudential Regulation Authority, the person with knowledge said. The PRA will take over responsibility for regulating banks when the Financial Services Authority is disbanded later this year. “There is a serious point regarding the extent to which regulatory intervention is desirable in what should be a market function,” said Bob Penn, partner at Allen & Overy in London. “Any suggestion of public sector involvement beyond policing Libor would be a worrying development.” ‘Most Important Number’ The BBA helped to introduce Libor in January 1986 to help cement London’s dominance in the markets for syndicated loans and interest-rate swaps. The BBA brand is attached to Libor fixings in at least 10 currencies, including the British pound, the U.S. dollar, the euro and Japanese yen. In 2009, the lobby group called Libor “the world’s most important number.” Angela Knight, the former Conservative lawmaker and Treasury minister who now runs the lobby group, didn’t return several calls seeking comment yesterday. She has previously denied that the group is distancing itself from Libor, which it licenses and publishes daily. Questions about the accuracy of Libor were first raised by the Bank for International Settlements, the central bank for central banks, in a March 2008 report that indicated lenders were “wary of revealing” information that could signal they were struggling to borrow funds. Justify Discrepancies Three months later, the BBA increased the number of banks that contribute to Libor and said it would require lenders to justify any discrepancies between their rate submissions and those of competitors with repeat offenders removed from the process. The changes were the first made to the rate since 1998. The BBA started BBA Libor Ltd. in 2009, whose revenue is derived from licensing the rate. The unit, whose directors include Knight, Sally Scutt, Knight’s deputy, and former Royal Bank of Scotland Group Plc deputy CEO Gordon Pell, had assets of 1.15 million pounds ($1.8 million) and liabilities of 958,824 pounds at the end of 2010, according to a June filing with Companies House. “Libor is not a commercial organization, has a significant pro bono function and seeks to cover its costs,” the BBA said in a statement. “The company has a revenue budget to cover operating costs recharged by the BBA,” the lobby group said. The lobby group last week removed material from its website that detailed its involvement with setting Libor, including a statement that it “calculates and produces BBA Libor at the request of our members for the good of the market.” Responsibility for setting the rate falls on Thomson Reuters, which aggregates submissions from banks and publishes the numbers daily, said Brian Mairs a spokesman for the BBA. Thomson Reuters Support “Thomson Reuters continues to calculate and distribute Libor on behalf of the BBA and in accordance with its governance procedures,” said Calvin Mitchell, a spokesman for the company. “We’ll support the BBA should any changes be recommended.” Bloomberg LP, the parent of Bloomberg News, competes with Thomson Reuters in selling financial and legal information and trading systems. The BBA has said it has never required banks to erect Chinese walls between those setting the rate and traders making bets on the future direction of the measure, leaving it up to the firms themselves and their regulators. Banks’ internal controls have become the focus of regulatory probes from Canada to Japan and from London to Brussels, and may result in a lesser role for the BBA in overseeing the measure. U.S. Case In the U.S., District Judge Naomi Reice Buchwald in Manhattan cited the Justice Department letter at a March 1 hearing in which she denied a request for documents by investors suing companies including Credit Suisse Group AG and Bank of America Corp. over claims they artificially suppressed Libor. Charles Schwab Corp. (SCHW), the largest independent brokerage by client assets, filed the lawsuit in August, claiming the banks manipulated Libor from 2007 in violation of U.S. antitrust law. “To me, it is simply too much to have them piggyback on the government’s investigation at this stage,” Buchwald said. Investigators are now scrutinizing communications between traders and rate-setters for evidence that traders collaborated to rig the rate to profit from wagers on future interest rates, people familiar with the inquiry have said. Canada’s Competition Bureau said in court filings that one bank had confessed to participating in a conspiracy among employees at HSBC Holdings Plc (HSBA), Deutsche Bank AG, ICAP Plc (IAP), JPMorgan, RBS and Citigroup Inc. (C) to rig the price of derivatives globally by manipulating Libor. UBS was the bank that alerted Canadian regulators to the alleged conspiracy in return for immunity from regulatory penalties for the firm, three people with knowledge of the inquiry said last month. UBS announced in July that it was cooperating with investigators and had been granted conditional immunity from some agencies. “Regulators on an ever-increasing basis are concluding that to manage the systemic risk that exists to the financial system, giving full freedom to the institutions is not something that is acceptable,” said Chris Roebuck, a visiting professor at Cass Business School.