FT Alphaville " Introducing New Libor The massive flaws in the method of setting Libor and similar rates are probably familiar to most FTAV readers by now - as are the challenges of coming up with a better replacement. The review led by new FSA chief Martin Wheatley set out to either "strengthen Libor" or "find an alternative to Libor." The latter, it seems, was just too hard. The obvious solution was to use actual transactions rather than guesses/estimates to compile the benchmark lending rates, but the problem is that actual unsecured interbank transactions are a bit thin on the ground, particularly these days. Here are some of the changes to Libor that Wheatley will set out today, as reported in the FT: More banks to be involved in making submissions (as the FT points out, BBA Libor uses 20 banks while Euribor uses 40). Banks" rate submissions will be kept confidential for three months. There will be far fewer fixings - only 20 instead of 150; and five of the currency rates will be dropped. The FSA will approve the individual responsible for the submissions at each bank. Banks will have to demonstrate to the regulator how they arrived at their estimates. An independent regulator will oversee it, instead of the BBA. Manipulation will be a crime. In case you needed any more evidence about why Libor's current methodology is a problem, CFTC chairman Gary Gensler ran through some good examples in his remarks to the European Parliament on Monday (H/T FTfm's Chris Flood). Some of them might make interesting ways to compare New Libor with Old Libor in a few years" time (we can hardly wait, either). Gensler pointed in particular to the strange lack of volatility in Libor rates compared to just about any other rate you might compare it to: In fact, a lot of the time most banks didn't change their submissions at all, he said: Based on publicly available data, in 2009, the rates submitted daily by banks for three-month LIBOR had not changed 55 percent of the time. In 2011, the comparable submission had not changed 70 percent of the time. In 2012 to date, the comparable submission had not changed 85 percent of the time. As Chart F shows, out of 182 LIBOR submission days in 2012, a majority of the banks changed their daily submissions fewer than 30 of those days. For a majority of the banks, five out of six days they did not change the rate. Which, when you compare changes in credit default swap premiums (far from a perfect measure, of course) of most banks to their Libor submissions, the difference is striking. Here's one example: There plenty more at the end of Gensler's testimony. Related links: Libor lending rate to get full overhaul - FT The mystery Libor precedent - FT Alphaville Libor, meet transaction data. Transaction data, meet Libor - FT AV Wheatley review discussion paper (August 2012, PDF) US regulator calls for faster Libor reform - FT This entry was posted by Kate Mackenzie on Friday, September 28th, 2012 at 8:35 and is filed under Uncategorised. Tagged with BBA, cftc, fsa, Gary Gensler, Libor, Martin Wheatley.