On August 10, HM Treasury published an initial discussion paper of the LIBOR Review which is being conducted by Martin Wheatley, the CEO-designate of the Financial Conduct Authority.
The Review is charged with reporting on:
necessary reforms to the current framework for setting and governing LIBOR;
the adequacy and scope of sanctions to appropriately tackle LIBOR abuse; and
whether analysis of the failings of LIBOR has implications on other global benchmarks.
The discussion paper sets out the Review’s initial view on the issues to be considered. It states that LIBOR has a number of significant weaknesses that have eroded its credibility as a benchmark and that retaining LIBOR unchanged in its current state is not a viable option, given the scale of identified weaknesses and the loss of credibility that it has suffered. LIBOR has to be significantly strengthened to take account of these weaknesses, while alternative benchmarks that can take on some or all of the roles that LIBOR currently performs in the market should be identified and evaluated.
The discussion paper sets out detailed ideas on how LIBOR could be comprehensively reformed and strengthened. It also observes that the issues that have been identified with LIBOR have broader implications for a range of other benchmarks, both within financial markets and beyond. It suggests that it is worth considering whether it is possible to establish a clear set of principles or characteristics that should be applied to all globally used benchmarks. These could include:
a robust methodology for calculation;
credible governance structures;
an appropriate degree of formal oversight and regulation; and
transparency and openness.
The LIBOR Review consultation period lasts only until September 7 as it is aiming to present its findings to the Chancellor of the Exchequer before the end of September.
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