Wednesday, August 6, 2008

BBA to enhance Libor governance

(FT) The British Bankers’ Association will strengthen the governance of Libor – in part by adding more independent members to the committee that oversees the key money market indices, which have faced criticism during the ongoing tensions in the money markets.

The association said it had retained law firm Clifford Chance to advise it on strengthening governance procedures and that all respondents to its consultation paper issued in June supported the enhancement in governance and scrutiny for one of the most important financial indicators.

High levels of Libor, the rate at which banks lend to each other, has added uncertainty to a financial system already under strain from the global credit crisis. There have been concerns about the fact it is set by a relatively small panel of commercial banks, which tell the BBA each day how much they think it will cost them to borrow from other banks.

The BBA said that feedback from the financial industry – including the panel banks and other banks and institutions that use Libor rates in pricing products – concluded that augmenting governance arrangements would contribute to the continuing accuracy of submissions from contributing banks.

Alex Merriman, the BBA executive director for wholesale and regulation, said: “One of the concerns among respondents was about the narrowness of the foreign exchange and money market committee [which oversees Libor], in that it is made up only of contributor banks.

“The view was that the committee should benefit from the expertise of external, non-panel banks.”

The enhanced governance will include: a tighter analysis of contributor submissions with the flagging of any apparent discrepancies; seeking the justification of contributions when discrepancies are flagged; the holding of regular meetings to discuss this analysis; reproducing enhanced formal guidance on submissions; and reissuing of clearer documentation of principles and processes to describe how the BBA will ensure the accuracy of the data.

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