INTRODUCTION

On 28 September 2012, HM Treasury published the

final report on the review of the London Interbank

Offered Rate ("LIBOR") undertaken by Martin

Wheatley, FSA Managing Director and Chief-

Executive designate of the Financial Conduct

Authority (FCA). This follows an initial discussion

paper published by HM Treasury on 10 August 2012

outlining its preliminary thoughts on its review of

LIBOR. The review was tasked with looking at the

structure and governance of LIBOR and to make

recommendations on how the system should be

reformed to ensure that the credibility of this

benchmark could be restored. This can be viewed as a

response to the manipulation of LIBOR rates

undertaken by various banking personnel which came

to light in April 2012.

The summary of the key points of the final report of

the Wheatley Review ("Review") is as follows:

KEY CONCLUSIONS

■ The Review favours comprehensively reforming

LIBOR rather than replacing it.

■ Transaction data should be explicitly used to

support LIBOR submissions.

■ Market participants should continue to play a

significant role in the production and oversight of

LIBOR.

■ The BBA should no longer run LIBOR and there

will be a tendering process for a new administrator.

■ There will be guidelines developed to govern

LIBOR submissions and a Code of Conduct to be

developed and run by the administrator.

■ In the meantime banks, when submitting, should

take into consideration the sort of transactions set

out in the Report when contributing their rates.

■ The submission of rates to LIBOR and the

administration of LIBOR will become regulated

and subject to FSA enforcement and criminal

prosecution.

■ There will be further work internationally with

European, US and other authorities to develop a

global approach to the regulation of LIBOR and

other global benchmarks.

KEY RECOMMENDATIONS

Regulation of LIBOR

1. Making submissions to and the administration

and calculation of LIBOR to become regulated

activities. At present there is no regulatory regime

which covers these activities and this in turn

affects the FSA's ability to supervise and take

enforcement action for contravening these

activities. The Review proposes the government do

this by amending:

LONDON INTERBANK OFFERED RATE (LIBOR)

The Wheatley Review published 28 September 2012

02 | LIBOR

▪ S.22 of Financial Services Markets Act

("FSMA") which sets out the nature of activity

which can be regulated.

▪ Schedule 2 of FSMA which lists the activities that

can be bought under the scope of FSMA

regulation.

▪ Amending the Regulated Activities Order 2011 to

include as regulated activities contributing to and

administering a benchmark, with LIBOR specified

as a relevant benchmark.

2. Submitting and administering LIBOR to become a

controlled function under the FSMA approved

persons regime. Individuals who are making LIBOR

submissions will need to be FSA approved and

satisfy the 'fit and proper' test. The review identifies

senior management, the manager making the

submission or individual submitters as the most

suitable people to perform the controlled function.

3. The submission of false or misleading information

in connection with a benchmark, such as LIBOR,

is a form of market abuse and should come under

the scope of the market abuse regime. As such,

amendments are being proposed by the European

Commission which will prohibit the false or

misleading transmission of information which affects

the calculation of a benchmark. This will be

considered for implementation in the new Market

Abuse Regulation which will replace the existing

Market Abuse Directive.

Institutional Reform

4. The British Banking Association ("BBA") should

transfer responsibility for LIBOR to a new

administrator. The new administrator will be

responsible for compiling and distributing the rate as

well as providing internal governance and oversight.

This should be achieved through a tender process to

be run by an independent committee convened by the

regulatory authorities.

5. The new administrator should fulfil specific

obligations as part of its governance and oversight

of the rate, paying due regard to fairness,

transparency and non-discriminatory access to the

benchmark. The administrator will be responsible

for:

▪ surveillance and scrutiny of submissions;

▪ publishing a statistical digest of rate submissions;

and

▪ periodic reviews to assess whether LIBOR meets

market needs effectively and credibly.

The Rules Governing LIBOR

6. A code of conduct should be drawn up by the

administrator and include:

i) Guidelines for the explicit use of transaction data

to determine submissions, such as:

▪ Guidelines concerning the role and use of inter-

bank deposit transaction data and other transaction

data and other relevant and related markets which

can be used to develop a precise assessment of the

inter-bank funding market.

▪ Detailed procedures for validating submissions

prior to publication and verifying submissions

after publication.

▪ Suspicious submission reporting procedures to be

implemented so that they are reported to the rate

administrator and oversight committee for review.

Any unaccountable or anomalous submissions

should be escalated to the FSA.

▪ Policies for training the LIBOR submitters

including what inputs to take account of when

determining submissions and how to use expert

judgement within the framework of the

submission guidelines.

ii) Systems and controls for submitting companies,

which will include:

▪ An outline of personal responsibilities within each

firm including internal reporting lines and

accountability. LIBOR submitters and associated

managers should be brought under the control of

the function responsible for contributors' liquidity

and liability management. Names of submitters

and personnel within this function have to be

recorded.

▪ Internal procedures to sign off rate submissions,

exception reporting and the provision of

management intelligence.

▪ Implementing disciplinary or whistle-blowing

procedures for attempts to manipulate the LIBOR

submission process (or failing to report this) of

which the FSA will be notified.

▪ Installation of effective conflicts of interest

management procedures and communication

controls both within and between banks and banks

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and other third parties. This will avoid any

inappropriate external influence over those

responsible for submitting rates.

iii) Submitting banks to have responsibility for

transaction record keeping, which will involve:

▪ Keeping accurate and accessible records of

transactions in inter-bank deposits and other

relevant financial instruments (with information

on their currency, maturity, price and counterparty

type).

▪ Records should be readily available to the new

rate administrator and any relevant governance

committees as well as the FSA.

iv) A requirement for regular external auditing for

submitting firms:

▪ The Institute of Chartered Accountants of England

and Wales (ICAEW) are developing guidance for

providing external assurance on interest rate

benchmark submissions.

▪ An annual internal audit and regular compliance

reviews will need be to be implemented. The first

audit is to occur 6 months after the introduction of

the code and then every 2-3 years thereafter.

7. Due to the urgency of the situation the hierarchy

of data described in the Review should be used by

submitting banks until the code of conduct has

been drawn up.

Specifically, submitting banks should use, in

descending order of preference

i) Contributing banks’ transactions in

▪ The unsecured inter-bank deposit market.

▪ Other unsecured deposit markets such as

certificates of deposit and commercial paper.

▪ Other related markets such as overnight index

swaps, repurchase agreements, foreign exchange

forwards, interest rate futures and options and

central bank operations.

ii) Contributing banks' observations of third party

transactions in the same market.

iii) Quotes by third parties offered to contributing

banks in the same markets.

iv) In the absence of transaction data relating to a

specific LIBOR benchmark, expert judgement

should be used to determine a submission.

Submissions may also be adjusted by applying the

following considerations:

▪ Proximity of transactions to time of submission

and the impact of market events between

transactions and submission time.

▪ Techniques for interpolation or extrapolation from

available data.

▪ Changes to the relative credit standing of the

contributor banks and other market participants.

▪ Non-representative transactions.

Improvements to LIBOR Mechanism

8. The BBA should stop the compilation and

publication of LIBOR for those currencies and

tenors for which there is insufficient trade data to

verify submissions. Instead the BBA should

immediately consult with users and submitters to plan

and implement a phased removal of these rates.

9. The BBA should publish LIBOR submissions after

three months. This will reduce the potential for

submitters to attempt manipulation and to reduce the

interpretation of submissions as a sign of

creditworthiness.

10. Banks, including those not currently submitting to

LIBOR, should be encouraged to participate as

widely as possible to compile the LIBOR rate. This

may result in new powers of compulsion so regulators

can require participation from banks who are not

submitting to a LIBOR panel.

11. Market participants using LIBOR should be

encouraged to consider and evaluate their use of

LIBOR. This could involve an analysis of whether

LIBOR is the most appropriate benchmark for the

transactions they are undertaking and whether

standards contracts contain adequate contingency

provisions that cover the possibility of LIBOR not

being produced.

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Institutional Co-ordination

12. The FSA and FCA should work closely with the

European and international community and

participate in the debate concerning the long term

future of LIBOR and other global benchmarks.

These authorities need to work together to establish

and promote clear principles for effective global

benchmarks.

FINAL THOUGHTS AND NEXT STEPS

In the foreword to the final report on the Review of

LIBOR , Martin Wheatley signifies that he and the FSA

and the FCA will be taking the investigation and tackling

of potential LIBOR manipulation very seriously and hint

the issue may merit a wider policy response due to its

international implications.

The Review clearly signals that all the relevant banks

need to undertake a serious reform of their structures,

procedures and policies in respect of their involvement

with benchmarks. These steps will be necessary to avoid

falling foul of the likely new regulatory requirements, if

adopted.

Martin Wheatley clearly concluded that LIBOR was too

widely and deeply embedded as a benchmark in

international markets to be abolished. Ironically

LIBOR's current problems are a consequence of its

international attractiveness as a basis from which a whole

host of interest rate contracts have been calculated -

particularly interest rate swaps globally. In most cases

this was done without the active involvement of those

who were administering LIBOR.

The LIBOR manipulation scandal has, however, brought

to light the extent to which the setting of benchmarks

both domestically and internationally has previously had

little scrutiny from regulators. It is now clear that this

has changed and other benchmarks will be increasingly

scrutinised and subject to regulation.

For firms the focus will be on the new requirements they

will have to fulfil to comply with the Report including

obtaining approval from the FSA for those involved in

the LIBOR rates process, setting up appropriate controls

for this process and complying with the new Code of

Practice once this is promulgated.

If you have any questions about the report, implications

for your business or would like to find out more about our

Financial Services Regulatory expertise, please contact:

Michael McKee

Partner

T +44 (0)20 7153 7468

michael.mckee@dlapiper.com

Simon Wright

Legal Director

T +44 (0)20 7796 6214

simoncj.wright@dlapiper.com