• LIBOR - The Wheatley Report
  • February 4, 2013
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction

    The London Inter-Bank Offered Rate (LIBOR) is the interest rate at which banks offer to lend to one another on the international inter-bank market. It is the most widely used of the global indices with an estimated US$300 - 350 trillion dollars worth of contracts currently tied to it.

    It is regarded as the industry standard, with many other global indices following a similar model and operating on similar principles.

    In June 2012 it became apparent that a number of banks had been illegally manipulating LIBOR for their benefit to either make their positions look more secure, or to make a greater profit. Coming so soon after the financial crisis inquiries, this caused further negative press for the banks and resulted in a massive public outcry.

    Consequently, on 2 July 2012 the UK Government commissioned a review (the Wheatley Report) to assess whether LIBOR should be reformed or replaced.


    The Wheatley Report was released on 28 September 2012 and was formally endorsed by the UK Government on 17 October 2012. It comprises of three main proposals:

    1. the British Bankers Association will no longer oversee the process of submitting rates to form LIBOR. The Financial Services Authority (FSA) will replace it with an administrator elected via a competitive tender
    2. the Financial Services and Markets Act 2002 will be revised to give the FSA the power to criminally prosecute those who attempt to manipulate the system
    3. LIBOR will be calculated differently using 20 instead of 150 reference rates, fewer currencies and data from a greater number of banks.

    These proposals will be brought into force in the early part of 2013 predominantly using the Financial Services Bill which is currently being debated in the UK Parliament.

    It is likely that these will be followed by similar reforms to those global indices which operate on similar principles to LIBOR and have similar weaknesses.

    What it solves

    An advantage of the Wheatley Report is that it does not recommend that a new benchmark replaces LIBOR. This was an option which the markets knew was under consideration and would have invalidated millions of existing contracts globally.

    The Wheatley Report has instead sought to correct LIBOR’s flaws by streamlining it. One way it does this, is by reducing the number of published rates from 150 to 20, which it is hoped will make it less prone to abuse.

    In addition, as it does not propose discontinuing the publication of LIBOR for those currencies which are widely used, it also succeeds in limiting the commercial effect of these reforms. The Wheatley Report only proposes discontinuing rates for those currencies which are rarely used, such as for example Australian or Canadian Dollar LIBOR, meaning that only a relatively small number of contracts will be invalidated.

    Finally, it also suggests the introduction of specific criminal offences to provide a disincentive that was previously lacking to all would-be manipulators.

    Ongoing issues

    What it does not solve is LIBOR’s dependence on banks lending to each other to generate verifiable data on which it can be based. When banks stop lending (as happened during the recent financial crisis) verifying the actual cost of lending becomes more difficult making the rate more vulnerable to abuse.

    Economists therefore fear that whilst the Wheatley Report makes LIBOR less prone to abuse, it has not solved this fundamental weakness, meaning that further reforms may be needed in the future.

    Escalation of Risk

    On 19 December 2012 UBS was fined US$1.5 billion dollars by the UK, Swiss and American authorities for its role in the manipulation of the LIBOR rate. It was the second fine imposed on a bank for manipulating LIBOR, following the US$450 million dollar fine paid by Barclays in June 2012.

    This judgement represented an escalation in the risk faced by all banks which had utilised LIBOR during this period for two reasons:

    1. As the fine was three times the size of that paid by Barclays it represents a declaration of intent from authorities in the UK and America to award more punitive judgements. In addition it also demonstrates that co-operating with the authorities (as UBS had) will only limit risk so far.
    2. The disclosures made during the UBS trial have identified far wider attempts to manipulate LIBOR than previously thought. This has resulted in an increase in civil law suits being filed in US courts and a widening of both the type of financial institutions under investigation and the potential level of liability that banks could face.

    The importance of this judgment is illustrated by the fact that currently over twenty banks are still under investigation in relation to LIBOR manipulation, a number which is likely to increase following the UBS verdict, suggesting that the LIBOR scandal may yet escalate further.

    Whilst the LIBOR scandal is mainly associated with financial markets in London and the US, the impact of the scandal and the subsequent reforms that it triggered are relevant globally, including to banks operating in the MENA region. The reforms are likely to trigger global reforms of any similar indices and to lead to greater scrutiny of all new transactions going forward which utilise this rate.