IntercontinentalExchange unveils plans for Libor reform

IntercontinentalExchange wants to rehabilitate Libor by proposing that submitting banks include transactions they conduct with central banks as part of their daily calculations.

In a paper released on Monday, the US derivatives exchange proposes the introduction of a more standard, prescriptive formula for banks to make their submissions to Libor - the lending benchmark on which around $350tn of derivatives contracts are referenced and which was at the centre of a manipulation scandal at the height of the financial crisis.

To toughen the new rate-setting process, ICE proposes establishing a system in which a wide range of data from around the world is used as a basis for submissions. It also wants to force banks to flag up more clearly those submissions which have been supplemented with human judgments.

The proposals form a key part of the long-term effort to rehabilitate Libor. A regulatory investigation into alleged manipulation of the benchmark has already resulted in billions of dollars of fines for banks and brokers, and sparked investigations into other market benchmarks in foreign exchange, metals and interest rate derivatives.

A clean-up has already begun with many tenors of Libor discontinued and its administration moving from the British Bankers' Association to an ICE subsidiary in February.

To restore Libor's long-term viability, ICE is mandated to anchor Libor in more transactions data. However, there are few deals in the unsecured interbank lending market, which Libor references.

Banks have continued to worry about the creditworthiness of the counterparties and demand has been curbed by tougher liquidity coverage ratios. Expansive monetary policies by the world's largest central banks have also increased the amount of liquidity available to banks.

"To be consistent with the original purpose of Libor and reflect the changes in bank funding in recent years, all wholesale and professional entities should be as eligible counterparty types, including central banks and large corporates," ICE said.

It added that it wanted banks to anchor rates based on their unsecured wholesale funding deposits, commercial paper and primary issuance certificates of deposit. The approach follows guidelines recommended by the UK-backed Wheatley report in 2012.

It found, however, that other types of rate the Wheatley report recommended referencing - including overnight indexed swaps, repo transactions, foreign exchange forwards, floating rates agreements and floating rate notes - should only be used when a dearth of deals means the submitter has to rely on expert judgment. The rates banks submit will be collected and validated by an ICE-built system.

After eight months of administration, ICE found the 20 banks that submit to the benchmark had developed their own methodologies for establishing Libor, often using differing transaction sizes and types of trade as the basis for their submissions. Banks will have two months to comment on ICE's proposals.

The framework was developed after discussions with the world's biggest central banks and regulators, including the Bank of England, the Federal Reserve and the European Central Bank.

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