CFA Institute on LIBOR Reforms: Use Actual Interbank Transactions, Not Estimates, to Set Rates

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

NEW YORK--(BUSINESS WIRE)--In an effort to restore and rebuild investor trust in the global financial markets following the LIBOR scandal, a global poll of CFA Institute members suggests that using rates set on actual interbank transactions is the most appropriate methodology for setting LIBOR, which is currently based only on estimated rates. In addition, the administration of LIBOR should stay with the industry, but should be subject to formal regulatory oversight. Lastly, regulators should also be endowed with powers to pursue criminal sanctions over LIBOR manipulation, according to 82 percent of respondents. Review the executive summary and full global survey results here.

“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.”

In part, CFA Institute surveyed members from around the world to inform regulators and other financial sector standard-setters, such as the Financial Stability Board, of tangible ways in which to restore investor trust in the global financial markets.

Survey Indicates Change Needed

The survey was completed by 1,259 members in the Americas, Asia Pacific, and Europe, Middle East, and Africa regions. Key findings include:

• The methodology for the setting of LIBOR: 56 percent 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 percent think that a hybrid methodology using actual and estimated rates would be appropriate.
• The oversight of LIBOR: 70 percent of respondents agree that the LIBOR submission process should become a regulated activity.
• The administration of LIBOR: 55 percent of respondents think LIBOR should be administered and overseen by industry bodies, but subject to regulatory oversight, with an overwhelming majority of 82 percent 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 percent of respondents) and repo rates (selected by 32 percent of respondents) the most popular choices.
• The groups most affected by LIBOR manipulation: 34 percent of respondents, a plurality, think institutional investors have been most negatively affected financially by the manipulation of LIBOR.

“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,” said Rhodri Preece, CFA, director of Capital Markets Policy for CFA Institute. “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.” Watch an interview with Rhodri Preece on the survey findings.

Notes to Editors

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 responded 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, and 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.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organisation is a champion for ethical behaviour 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 114,000 members in 139 countries and territories, including 102,500 charterholders, and 136 member societies. For more information, visit www.cfainstitute.org.