Revelations that bank traders attempted to manipulate LIBOR, the London Interbank Offer Rate, on a widespread and routine basis over the course of many years have rocked the global financial community and fueled international calls for reform. In response, the U.K. Government completely overhauled the governance of LIBOR, adopting in full the recommendations of the Wheatley Review, an independent review of LIBOR led by Martin Wheatley, CEO of the new Financial Conduct Authority (FCA) in the UK. Among other reforms, effective April 1, 2013, both “providing information in relation to” LIBOR and administering LIBOR are regulated activities in the United Kingdom. In addition, a new, independent administrator will provide oversight of LIBOR. NYSE Euronext, selected as the first administrator under the new regime, will begin oversight of LIBOR at the beginning of next year.
These reform efforts are an important first step towards restoring the credibility of LIBOR as an interest rate benchmark. The reforms instituted to date, however, do not address more fundamental concerns with LIBOR. In particular, even non-manipulated submissions sometimes bear little relation to actual market transactions because few market transactions occur in certain interbank unsecured lending markets, particularly in times of market stress. As Mervyn King has observed, LIBOR “[i]s in many ways the rate at which banks do not lend to each other…it is not a rate at which anyone is actually borrowing.”