Implementation of the Wheatley Report on LIBOR – considerations for financial institutions
30 November 2012
HM Treasury has published Martin
Wheatley's final report (the "Report") on the
review of LIBOR and the UK Government has confirmed that it accepts
all the recommendations in the Report.
The Report reached three fundamental conclusions:
- There is a clear case for a comprehensive reform of LIBOR,
rather than replacing the benchmark with a new one.
- There should be strict and detailed processes for verifying
LIBOR submissions against transaction data. LIBOR should only be
published for those currencies and tenors for which there is
sufficient transaction data to corroborate the LIBOR
- Market participants should continue to play a significant role
in the production and oversight of LIBOR.
Based on these conclusions, the Report sets out a ten point plan
for the reform of LIBOR. This plan includes proposals for
governance and institutional reform, regulation, technical changes
and contingency planning.
Key points include the following:
transfer of responsibility for LIBOR from the BBA to a new
administrator who would be responsible for compiling and
distributing the rate as well as providing credible internal
governance and oversight. As part of its governance and oversight
of the rate, the new administrator would be required to fulfil
specific obligations as to transparency and fair and
non-discriminatory access to the benchmark. It would also, as a
priority, introduce a code of conduct for
submissions and administration to be made 'regulated activities'
under the Financial Services and Markets Act 2000 and manipulation
of LIBOR to be made an offence under Section 397 of the Financial
Services and Markets Act 2000.
for certain currencies and tenors to be phased out. In
- publication of rates for Australian dollar, Canadian dollar,
Danish krone, New Zealand dollar and Swedish krona should be
- publication of LIBOR for four, five, seven, eight, ten and
eleven months should be discontinued; and
- continued publication of overnight, one week, two weeks, two
months and nine months should be re-considered.
The effect of this would be to reduce the number of LIBOR
benchmarks from 150 to 20. The recommendation is that these rates
would be phased out over a 12 month (or potentially shorter)
transition period. Work towards implementing this recommendation
should be carried out by the BBA.
LIBOR submission guidelines (using available data to inform and
corroborate the LIBOR submissions). The guidelines will also
provide that LIBOR submissions should be withheld from publication
for at least three months to reduce the potential for submitters to
manipulate the market.
broader range of banks should be encouraged (and potentially
compelled) to participate in the LIBOR compilation
Market participants should be encouraged to consider whether LIBOR
is the most appropriate benchmark for their transactions and
whether standard contracts contain adequate contingency provisions
should LIBOR not be available.
The FSA expects firms to take appropriate steps to prepare for
the impact of these proposals and a failure to do so is likely to
be considered a breach of the FSA's governance requirements set out
in its systems and controls handbook (SYSC) and General Principle
3, that firms must organise their affairs properly with appropriate
systems and controls.
The key areas of contractual focus for financial markets
participants following the publication of the Report are likely to
include the following:
The Loan Market Association is currently in
the process of discussing the issues arising out of the Report in
order to compile its own set of recommendations, which have yet to
be published. Meanwhile it has published an amended LIBOR
definition in its primary template facility agreements to deal with
the perceived threat of negative LIBOR rates being published.
If you have any questions on this alerter or
would like to discuss how the Report could affect your
organisation, its practices and documentation (both existing deal
documentation and your standard documents) please do not hesitate
to get in touch with a member of the Field Fisher Waterhouse LLP
Finance Group. We would be pleased to assist
(1) On 17 October 2012 Greg Clark, the Financial Secretary
to the Treasury released a written ministerial statement in which
it was confirmed that Baroness Hogg has agreed to chair a panel of
independent experts tasked with identifying an appropriate
successor to the BBA as LIBOR administrator.