The LIBOR scandal chipped away at investors’ confidence in the financial market, which has been rocky at best since the onset of the recession.
So, the CFA Institute has released its suggestions on how to revamp the calculation of interbank rates. In a new poll, it finds using rates set on actual interbank transactions is the most appropriate methodology for setting LIBOR.
Further, CFA members say the administration of LIBOR should stay with the industry, but should be subject to formal regulatory oversight. The majority (82%) says regulators should be allowed to pursue criminal sanctions over any manipulations.
“LIBOR underpins the pricing of a vast array of financial instruments and products, and any weaknesses in its calculation and oversight jeopardize the integrity of the financial system,” says Rhodri Preece, director of Capital Markets Policy for CFA Institute.
“Reforming LIBOR is a crucial step to restoring public trust from its current fragile, and professionals have made it clear that the process can be improved by using actual transaction rates and better oversight.”
- More than half of those polled (56%) think the most appropriate methodology for the setting of LIBOR would be an average rate based on actual inter-bank transactions only. A further 32% think a hybrid methodology using actual and estimated rates would be appropriate.
- The majority (70%) agrees the LIBOR submission process should become a regulated activity.
- Possible alternatives to LIBOR: The survey suggests there are a number of possible alternatives to LIBOR, with other market-based interest rates and repo rates being the most popular choices.
- A third (34%) say institutional investors have been most negatively affected financially by the manipulation of LIBOR.