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Libor not "fit for purpose", says FSA


FSA's chief regulator outlined proposals to reform or replace Libor on Friday

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The Financial Services Authority's chief regulator outlined proposals on Friday to “reform” or replace the Libor benchmark interest rates because they are no longer “fit for purpose”.

The FSA has been reviewing the Libor rates as a first step to overhauling the interbank lending rates following the rate rigging scandal that saw US and UK regulators fine Barclays £290 million.

"The existing structure and governance of Libor is no longer fit for purpose and reform is needed," the FSA's managing director, Martin Wheatley, said in a speech in London.

The future of other benchmarks - for everything from oil and gold to stock prices - was also under scrutiny, he said.

The London Interbank Offered Rate, known as Libor, sets prices for everything from credit card payments to complex derivatives, but its credibility has been damaged since it emerged that it had been manipulated by the big banks that set it.

Wheatley's review was ordered after UK bank Barclays was fined and lenders such as Royal Bank of Scotland also face fines.

In his proposals, Wheatley makes clear alternative benchmarks to Libor should be used in some cases while the calculation of the rates themselves needs to be done differently.

Benchmarks would be based less on judgement and more on actual trades, he suggested. Banks could also be obliged to contribute to setting Libor to widen participation.

Until now, membership of the Libor rate setting panel has been the preserve of a small group of banks, which volunteer daily estimates for the rates at which they would borrow different currencies for different periods.

It was impossible to replace Libor straight away because so many contracts were linked to it and it might not be possible to replace completely because alternatives are not perfect, Wheatley told Reuters on Thursday.

Basing benchmarks on actual trades would raise the problem of what to do when there were no trades for a specific rate, but Wheatley suggested that could be addressed through "interpolation" from more frequently traded rates.

The industry will have until September 7 to respond to Wheatley's review with final recommendations to be made by the end of next month. Some of those are expected to be enshrined in a new law next year.

Bank of England Governor Mervyn King told fellow central bankers in July that radical reforms of the Libor system were needed and called a meeting in September to discuss it.

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