BLOW FOR THE CITY OF LONDON

The owner of the New York stock exchange has been handed responsibility for setting controversial LIBOR interest rates in a move slammed by MPs as a ‘tremendous blow’ to the City of London.

Earlier this week the Treasury confirmed that the key role will pass from lobby group the British Bankers’ Association (BBA) to transatlantic NYSE Euronext from early next year.

The process, which will still take place in London, will be overseen by City watchdog, the Financial Conduct Authority (FCA).

But while FCA head Martin Wheatley hailed this as ‘an important step in enhancing the integrity of LIBOR’, John Mann, a member of the Treasury Select Committee, blasted the decision.

The Labour MP said it was further evidence that British banks are being unfairly singled out for rigging LIBOR interest rates – while, he says, their US counterparts escape punishment.

He said:

… This is a tremendous blow to the prestige of the City of London and sends out the message that you can’t trust the British.

… What the Americans have been doing is selectively picking out British banks that have done wrong and selectively ignoring the same scandals that have been committed by their own banks… The Chancellor has failed to stick up for the City. French and Germans will be rubbing their hands with glee at the prospect of stealing other financial markets.

LIBOR – The London Interbank Offered Rate – is a key benchmark rate which is used to set mortgages for millions of homeowners and is linked to $300 trillion of financial contracts around the world.

The BBA was criticised for being asleep on the job as a number of banks, including Barclays, the Royal Bank of Scotland and UBS, routinely rigged rates under its nose.

This culminated in huge fines for these banks and the decision by an independent review headed by Mr Wheatley to strip the BBA of its role.

The decision to award the contract to the New York Stock Exchange-owner followed a bidding war orchestrated by an independent committee, headed by former journalist Baroness Hogg – now a senior independent director at the Treasury. NYSE Euronext, which owns the pan-European Euronext market and will pay £1 for BBA Libor Ltd’s assets, said it is ‘uniquely placed’ to restore the international credibility of LIBOR. BBA has refused to reveal how many of its employees work on LIBOR.

Failed bidders are understood to include financial information provider Thomson Reuters, which has calculated LIBOR on behalf of the BBA since 2005.

COMMENT

The British Bankers’ Association, a wildly discredited organisation given its mishandling of LIBOR, the interest rate that sets the price for trillions of dollars of transactions across the world, has much to answer for. Its sclerotic behaviour under the BBA’s previous leadership failed to respond with any willpower to criticisms made by the Federal Reserve. Had it done so, it is possible that the LIBOR scandal – which wiped out the top management at Barclays – might never have happened.

Not that the Bank of England has totally clean hands in any of this. It may have had no direct responsibility for keeping Britain’s markets honest, but it can be accused of being lackadaisical in making sure the BBA acted on Fed criticisms and forced through reforms designed to erect Chinese walls between LIBOR setters and traders so that opportunities for rigging were stamped out.

Paradoxically, the Libor business that NYSE Euronext will inherit has shrunk dramatically. Post the Great Recession the LIBOR market has been in deep slumber because banks are so distrusting of each other, especially in the eurozone.

It’s possible that among the reasons for awarding the LIBOR contracts to NYSE Euronext rather than the London Stock Exchange is that London’s bid came in association with Thomson Reuters, the financial institution which set the reference rate under the old broken regime.

Thomson Reuters’ independence has been challenged recently by the New York State Attorney Eric Schneiderman who is critical of an arrangement under which premium customers get privileged access – a two second advantage – to the University of Michigan consumer confidence index. At a time when the City is under siege from Brussels over a variety of issues, it does seem bizarre that we should allow an interest rate market that grew in London in the 1970s, to escape US tax measures, to head back across the Atlantic.

And while several European banks, including Barclays, RBS and UBS, have paid a heavy price from US regulators for LIBOR manipulation, so far there has not been a single successful prosecution or settlement with an American bank. That in itself should raise many previously unanswered curious questions, as LIBOR setting now moves to the United States.