Fix LIBOR, don’t replace it. That, in short, is the message coming from corporate treasurers and financial-industry associations to an independent inquiry commissioned by the UK government. They are concerned, says one treasury expert, that a forced move to a successor benchmark rate could cause “chaos.”
The inquiry team, headed by Martin Wheatley, managing director of the UK’s Financial Services Authority (FSA), the industry regulator, was established in July to look at the framework for setting LIBOR in the wake of the rate-rigging scandal that resulted in $451 million in fines for Barclays. Other banks are still being investigated.
The UK’s Association of Corporate Treasurers (ACT) said in its submission to the inquiry team that if LIBOR rates ceased to be published and a successor rate was not compatible with current contractual definitions of LIBOR, the impact would be “disruptive.” Instead, the ACT wants regulators to take responsibility for LIBOR and banks to establish better internal controls.
The International Capital Market Association (ICMA) warned against “switching off” LIBOR, but also said changes in the derivation of the benchmark rate (as opposed to changes in its governance or regulation) could be just as troublesome. To give some scale to the problem, the ICMA’s calculations suggest that at the end of 2012, there will be $1.3 trillion of floating rate notes outstanding that use LIBOR. At the end of the decade, there will still be some $150 billion of such notes.
The ACT believes that since regulators started looking into LIBOR manipulation at a number of banks about three years ago, reported rates have been much sounder, so there may not be a need to fundamentally change the benchmark rate. As FSA chairman Adair Turner recently told a UK parliamentary committee, “[LIBOR] has been pretty robust since 2009 and 2010…. People are trying to do it as honestly as they can.”