Exclusive: Bank Body Calls For Rate-Fixing Fines

Traders found guilty of attempting to manipulate the interbank borrowing rate Libor should be fined, publicly censured and struck off the City regulator's approved persons register, according to the organisation which supervises the rate-setting process.

I have been leaked a copy of the blueprint submitted by the British Bankers' Association (BBA) to a Government-backed inquiry aimed at restoring the integrity of the benchmark interest rate.

It recommends a sweeping overhaul of Libor including a "medium term transition to a new rate-setting process based on actual trade data", ending the involvement of currencies such as Australian and Canadian dollars in the Libor system, and a streamlining of the rate-setting process for currencies including sterling, euros, yen and US dollars.

In June, Barclays was fined nearly £300m for attempting to rig the rate, which is involved in governing hundreds of trillions of pounds-worth of financial contracts around the world.

Other large banks are expected to face similar punishments from authorities in the UK, US, Europe and Asia in the months ahead, underlining the importance of establishing a new governance framework for Libor.

The BBA's proposal to fine, censure and ban individuals found to have falsified Libor submissions falls short of a recommendation to hand regulators specific powers of criminal investigation and prosecution, but would nevertheless represent a significant toughening of the existing regime.

The Serious Fraud Office is investigating the Barclays rate-rigging offences and confirmed in July that "existing criminal offences are capable of covering conduct in relation to the alleged manipulation of Libor and other interest rates," which insiders say the BBA supports.

The BBA's suggestion is part of a package of reforms proposed in a six-page letter from Anthony Browne, the new chief executive of the bank lobbying group, to Martin Wheatley, chief executive-designate of the Financial Conduct Authority, who will unveil the results of his three-month probe on Friday.

Mr Browne's letter, dated September 7, was sent six days before the BBA's governing body voted to surrender its role in the Libor-setting process after more than 25 years as its sponsor.

In its submission, the BBA proposes a radical overhaul of Libor, including new regulatory supervision for those involved in the rate-setting process and the closure of panels which oversee currencies for which there are few contributing banks.

"A new controlled function should be introduced which specifically refers to best practice and codes of conduct for benchmark rate setting and panel surveys to ensure that best practices are understood and followed," the letter said. "This should not be restricted to BBA Libor."

Sterling Libor is currently set by a panel of 16 banks which make estimates about their ability to borrow from other participating banks over various periods and in different currencies. There has been widespread concern about the ability to replace these indices with actual transactional data for markets where little trading activity takes place.

Mr Browne attempted to address this issue in his letter:

"The long term decline of wholesale money markets (the result both of regulatory changes in liquidity and capital rules and the 'credit tiering' observed since the onset of the global financial crisis) is likely to continue," he wrote.

"An appreciation of the very low numbers of actual wholesale cash trades is key to understanding the challenge of rate setting in stressed conditions or when the markets are to all intents and purposes closed. Whatever methodology is adopted, there is a clear need for direction from the public authorities to cover situations of low market activity."

Insiders said that Mr Wheatley would propose a series of solutions to this problem in his review on Friday.

Emails and other messages from some Barclays traders from 2008, which were published as part of its settlement with regulators in June, underlined the difficulty of submitting rates during a period when many funding markets were frozen.

"The lack of trade data means that there will often not be a way for a rate submitter to make a BBA Libor submission without some subjective judgement being made," the BBA letter said.

"This situation creates operational and legal risk to firms and to individual rate setters acting in good faith. The public good which a credible reference rate provides could become unsustainable unless these issues can be resolved."

Among the other suggestions made by Mr Browne are the retention of Libor, which he argued "remains a sufficiently well respected benchmark" and in the short term "the introduction of a regulator-owned governance framework and code of conduct, and some streamlining of tenors and currencies for which BBA Libor is set (subject to further consultation)".

The Libor-setting process has also been riven by complaints about participating banks' conflicts of interest because of the impact that rate submissions can have on banks' perceived creditworthiness - an issue that was at the heart of the tussle during the summer between Barclays and the Bank of England which resulted in the resignation of Bob Diamond, Barclays' chief executive.

Mr Browne pointed out in his September 7 letter that there remained disagreement over the approach to this issue, recommending an independent process for collection of actual trade data and scrutiny of actual rates paid, as well as "an analysis of outliers and any identified governance issues".

The BBA also proposed a more formal role for "global authorities and central banks to support the valuable market infrastructure which benchmarks provide", which many insiders see as an essential step if Libor - or any replacement - is to be viewed as credible.

"The presence of the authorities in the governance framework would add an essential plank to strengthen both the integrity of the benchmark and the rate setting process itself. The BBA believes that there is now broad acceptance of this.

"A strengthened oversight model under the auspices of an FSA/FCA sponsored senior steering group with invited participants to include banks, representatives of central banks for Libor currencies, users of BBA Libor and the UK tripartite authorities would provide a robust forum for the direction and introduction of any necessary changes."

The BBA's blueprint warns of potential disruption to financial markets from moving to alternative benchmarks, saying that "transition would need to be carefully handled over a long period to avoid operational and systemic instability".

The BBA declined to comment on its submission to the inquiry beyond a statement that it would support Mr Wheatley's conclusions in response to Sky News' story yesterday that the body is to give up its role in setting the benchmark.