The second half of 2012 saw a number of major financial institutions censured for the alleged manipulation of submissions made to the British Bankers’ Association (BBA) for the compilation of BBA LIBOR. In addition to direct enforcement action against those alleged to have participated in such manipulation, regulators have also taken significant steps to reform LIBOR itself and the method by which it is determined. GCC financial institutions and borrowers will be concerned to ensure that these reforms are sufficient to restore confidence in LIBOR as one of the most commonly referenced benchmarks for financial transactions in the region.
The proposed reforms to LIBOR were set out by Martin Wheatley, Managing Director of the Financial Services Authority and CEO-designate of the Financial Conduct Authority, in the Wheatley Review published on 28 September 2012. These reforms will substantially change the way in which LIBOR is determined, and include:
- the introduction of a statutory regime for the regulation of submissions made by banks for the compilation of LIBOR;
- the transfer of responsibility for compiling and distributing LIBOR from the BBA to a new independent administrator;
- the addition of new governance and oversight functions for the new independent administrator, including implementation of a code of conduct for submitting banks, surveillance and scrutiny of submissions, publication of submission-related information and periodic reviews of market requirements;
- the discontinuation of LIBOR for currencies and tenors for which there is insufficient trade data to corroborate submissions;
- the publication of submissions by individual submitting banks after 3 months to reduce the risk of potential manipulation of LIBOR; and
- the inclusion of a wider range of submitting banks in the LIBOR compilation process.
The Wheatley Review has been endorsed in full by HM Treasury and draft legislation has been published for implementation of a number of its proposals. In the interim, both GCC financial institutions and borrowers may wish to consider:
- if the terms of their financing documentation reference BBA LIBOR specifically, whether there is clear “successor page” wording which allows for any successor LIBOR to the BBA screen rate to be used in the absence of the BBA screen rate; and
- whether the terms of their financing documentation reference currencies or tenors of LIBOR that are to be discontinued, in which case it may be prudent to commence discussions with counterparties to agree an alternative reference rate.
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