In order to inform the regulatory reform efforts in the wake of the LIBOR scandal, a global poll of CFA Institute members suggests that rates set on actual interbank transactions are the most appropriate methodology for setting LIBOR, which is currently based on estimated rates only. The administration of LIBOR should stay with the industry, but should be subject to formal regulatory oversight. Regulators should also be endowed with powers to pursue criminal sanctions over LIBOR manipulation, according to 82% of respondents.
The poll seeks to inform the UK government’s Wheatley Review and the European Parliament’s public consultation on LIBOR from the investor perspective, and therefore contribute to the rebuilding of trust in the financial markets.
The survey, which closed on Thursday 6 September 2012, was based on the responses from 1259 members from across the world. The key findings from the survey questions are:
The groups most affected by LIBOR manipulation: 34% of respondents, a plurality, think institutional investors have been most negatively affected financially by the manipulation of LIBOR.
The methodology for the setting of LIBOR: 56% of respondents think that the most appropriate methodology for the setting of LIBOR would be an average rate based on actual inter-bank transactions only; a further 32% think that a hybrid methodology using actual and estimated rates would be appropriate.
The oversight of LIBOR: 70% of respondents agree that the LIBOR submission process should become a regulated activity.
The administration of LIBOR: 55% of respondents think LIBOR should be administered and overseen by industry bodies, but subject to regulatory oversight, with an overwhelming majority of 82% in favour of the regulator having powers to pursue criminal sanctions over LIBOR manipulation.
Possible alternatives to LIBOR: The survey suggests that there are a number of possible alternatives to LIBOR, with other market-based interest rates (selected by 43% of respondents) and repo rates (selected by 32% of respondents) the most popular choices.
“Because LIBOR underpins the pricing of such a vast array of financial instruments and products, any weaknesses in its calculation and oversight jeopardise the integrity of the financial system. Reforming LIBOR is therefore a crucial step to restoring investor and public trust from its current fragile state. Investment professionals have made it clear that the process can be improved by using actual transaction rates and better oversight. Allied to a strong commitment to ethical behaviour among individuals and firms, these steps can help re-build confidence,” Rhodri Preece, CFA, director of Capital Markets Policy for CFA Institute, said.
“Libor as a reference rate is well entrenched in the GCC monetary system and is frequently used as a benchmark comparison to domestic reference rates like SIBOR and KIBOR. The findings from our survey are encouraging and very relevant to this region. Any reforms in setting Libor will affect the cost of doing business in the GCC and hence should be of importance to both lenders and borrowers from the Middle East,” Raghu Mandagolathur, from CFA Kuwait, said.