No Marshmallows, Just Term Papers
LIBOR (London interbank offered rate) is the most widely used short term interest rate all over the world. Popularity of this rate lies on the participation of financial institutions those have global presence and acceptance. But the mechanism of setting LIBOR is faulty. These institutions that have the responsibility to set a competitive rate that will represent prevailing market condition. But they took the opportunity of mechanism that entitles them to quote the willing rate not the actual rate. As the institutions don’t have to transact the rate they quote they are in combination quoting rates which are contrary to the market condition. So acceptance of LIBOR came into question and due to this scandal reforms of the LIBOR mechanism came under consideration.
Reforms of LIBOR:
Chief executive designate of UK financial conduct authority suggested 10 key reforms measures to restore the trust on LIBOR. His suggestions are presented below:
1) The authorities should introduce statutory regulation of administration of, and submission to, Libor, including an Approved Persons regime, to provide the assurance of credible independent supervision, oversight and enforcement, both civil and criminal.
2) The BBA should transfer responsibility for Libor to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing credible internal governance and oversight. This should be achieved through a tender process to be run by an independent committee convened by the regulatory authorities.
3) The new administrator should fulfill specific obligations as part of its governance and oversight of the rate, having due regard to transparency and fair and nondiscriminatory access to the benchmark. These obligations will include surveillance and scrutiny of submissions, publication of a statistical digest of rate submissions, and periodic reviews addressing the issue of whether Libor continues to meet market needs effectively and credibly....