Which is the best private sector organisation to fix Libor? Barclays, the wags will no doubt reply. But for the committee tasked with replacing the British Bankers’ Association as the benchmark’s administrator, it is a serious question - and one that will focus attention on how the new body will get paid.
At present the BBA, which oversees the Libor-setting process and owns the brand, makes money from licensing data providers to use its rates. It also pays Thomson Reuters, the parent company of Reuters Breakingviews, to collate and publish the individual bank submissions used to calculate 150 different daily Libor rates.
The presiding committee, to be headed by City bigwig Sarah Hogg, could replicate the BBA arrangement with a securities exchange or other credible body doing the job. Or it could appoint a data manager like Thomson Reuters or Bloomberg to handle the entire process.
Yet, as Wheatley’s review indicates, private sector parties may need a bigger carrot to get involved. The Libor brand, such as it was, has been badly damaged. This brand value will rise if, as is hoped, the new administrator restores faith in the system and the administrator can fairly take claim to at least some of the value created.
But in the meantime, Wheatley’s review seems to doubt licensing fees will be an adequate financial incentive: bidders, it says, will be allowed to “explore the commercial viability of Libor”. That caution seems reasonable, because whoever wins the tender will probably need to invest its own money to ensure that its oversight capabilities prevent any future Barclays-style attempts to fiddle the rate. It is not clear that the BBA’s Libor licensing fees cover even their current running costs.
Hogg will have to hope that these extra costs are still outweighed in the eyes of bidders by the chance to be gatekeeper to the benchmark rate for $300 trillion of financial contracts. If not, there may be a need for some kind of levy on Libor’s users.
And if users have to pay, that might give them an extra incentive to find alternatives which, in turn, could undermine the attraction of the administration job.
