LIBOR (short for London Inter-Bank Offered Rate) has had a torrid time since it was revealed to be rotten back in June. A measure of the cost of lending for banks based in London, the rate has long been an obscure part of the plumbing of the global financial system. It was forced into the spotlight by accusations that banks had manipulated it for the benefit of their traders. Today Martin Wheatley, managing director at the Britain’s Financial Services Authority and author of an independent review on LIBOR, revealed his ideas for the future of the benchmark rate. His plan lists ten points, but it can be boiled down to three main proposals. First, the British Bankers Association will no longer oversee the submissions process. In its place, the FSA will “elect” a more “suitable” administrator. This will be done via a competitive tender. Second, those trying to trick the system will face criminal charges. To allow the FSA to prosecute manipulators, Britain’s financial services and markets act (FSMA 2002) will be changed. Mr Wheatley hopes that this will scare would-be manipulators from submitting false estimates.

Third, LIBOR will be calculated differently. Currently, estimates are used to come up with rates for maturities and currencies for which hard data are unavailable. To limit the potential for manipulation, the number of reference rates will be cut from 150 to 20, and the FSA will keep a closer eye on those remaining. The number of banks involved in the setting of LIBOR will increase and data from actual transactions will be used when possible.

The British government has said it plans to use the Financial Services Bill, currently being discussed in parliament, as the main “legislative vehicle” for implementing Mr Wheatley’s recommendations. The timescale is unclear, but it is “anticipated” that the reforms will come into effect sometime in 2013.

Given that $300 trillion of contracts are tied to LIBOR, trying to change the current system without disrupting the markets will be difficult (see article in this week’s issue), but as Mr Wheatley made clear this morning, “LIBOR requires complete overhaul”.