core sector communique

CFA Institute on LIBOR Reforms: Criminal Sanction Powers and Use of Actual Rates

Response of investment professionals points to rebuilding trust and integrity in the finance industry

In order to inform the regulatory reform efforts in the wake of the LIBOR scandal, a global poll of CFA Institute members suggests that rates set on actual interbank transactions are the most appropriate methodology for setting LIBOR, which is currently based on estimated rates only. The administration of LIBOR should stay with the industry, but should be subject to formal regulatory oversight. Regulators should also be endowed with powers to pursue criminal sanctions over LIBOR manipulation, according to 82% of respondents.London, United Kingdom, 11 September 2012

The poll seeks to inform the UK government’s Wheatley Review and the European Parliament’s public consultation on LIBOR from the investor perspective, and therefore contribute to the rebuilding of trust in the financial markets. 

The survey, which closed on Thursday 6 September 2012, was sent to 21,000 members, of which 1259 members responded (a response rate of 6%). The key findings from the survey questions are:

• The groups most affected by LIBOR manipulation: 34% of respondents, a plurality, think institutional investors have been most negatively affected financially by the manipulation of LIBOR.
• The methodology for the setting of LIBOR: 56% of respondents think that 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 that a hybrid methodology using actual and estimated rates would be appropriate.
• The oversight of LIBOR: 70% of respondents agree that the LIBOR submission process should become a regulated activity.
• The administration of LIBOR: 55% of respondents think LIBOR should be administered and overseen by industry bodies, but subject to regulatory oversight, with an overwhelming majority of 82% in favour of the regulator having powers to pursue criminal sanctions over LIBOR manipulation.
• Possible alternatives to LIBOR: The survey suggests that there are a number of possible alternatives to LIBOR, with other market-based interest rates (selected by 43% of respondents) and repo rates (selected by 32% of respondents) the most popular choices.

Rhodri Preece, CFA, director of Capital Markets Policy for CFA Institute, commented: “Because LIBOR underpins the pricing of such a vast array of financial instruments and products, any weaknesses in its calculation and oversight jeopardise the integrity of the financial system. Reforming LIBOR is therefore a crucial step to restoring investor and public trust from its current fragile state. Investment professionals have made it clear that the process can be improved by using actual transaction rates and better oversight. Allied to a strong commitment to ethical behaviour among individuals and firms, these steps can help re-build confidence.”

Survey Methodology

On 22 August 2012, a regionally stratified random sample of 21,000 CFA Institute members were invited to participate in the online survey (7,000 from each of the following regions: the Americas, Asia Pacific, and Europe, Middle East, Africa). One reminder was sent to non-respondents on 28 August, and the survey closed on 4 September 2012. 1,259 members respondede for a response rate of 6% and a margin of error of ± 2.7%.

Respondent Profile 

Of the 1,259 members who responded, 30% are from the Americas, 27% from Asia Pacific, and 44% from Europe, Middle East, Africa. Global (total) results have been re-weighted to accurately reflect the entire CFA Institute membership (65% are from the Americas, 16% from APAC, and 18% from EMEA). Statistically significant regional differences are noted throughout the report. 

85% of respondents are CFA Institute charterholders. The top job functions of respondents are portfolio managers (20%), research analysts (14%), consultants (6%), risk managers (6%), corporate financial analysts (5%), investment banking analysts (5%), and financial advisors (5%). 25% of respondents listed other occupations and 10% of respondents did not provide an occupation.

CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 113,000 members in 140 countries and territories, including 102,000 CFA charterholders, and 137 member societies. For more information, visit www.cfainstitute.org.