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IPE special report May 2018

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Pensions experts welcome Wheatley Review of LIBOR, but call for more clarity

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  • Pensions experts welcome Wheatley Review of LIBOR, but call for more clarity

UK - The LIBOR reforms recommended by Martin Wheatley in his review are an encouraging step towards better controlling the calculation of the rate without making radical overalls that could distort markets, a number of pension representatives have said.

In July, the chancellor of the Exchequer charged Martin Wheatley with undertaking a review of the structure and governance of the inter-bank lending rate and the corresponding criminal sanctions regime following the emergence of the attempted manipulation of LIBOR and EURIBOR. 

Lucy Barron, LDI solution manager at AXA Investment Managers, welcomed the Wheatley Review, which was released today.

She told IPE a reform of LIBOR was necessary, but rejected any immediate replacement of LIBOR by an overnight benchmark such as the Sterling OverNight Index Average (SONIA).

"Pension funds are currently partway through their journey of reducing the risk in their schemes," she said. "Throughout this, derivatives will continue to play a key role, and things should be tightened up and improved such that the credibility of LIBOR could be improved and LIBOR could be retained as a benchmark."

Among the measures, Wheatley recommended reducing the number of currencies and maturities for which LIBOR is published due to the lack of available data.

He also recommended increasing the panel of banks submitting to LIBOR, as well as delaying the publication of individual submissions by a period of at least three months, as opposed to the current daily submission that could facilitate the manipulation of the rate.

"Having more banks will help to reduce the significance of submissions from any one bank," Barron said.

"Given that high-quality banks lending to each other is a key part of that definition, we do not believe that the credit quality of the panel banks should be reduced when the number of counterparties is increased."

However, Boris Mikhailov, principal within Mercer's Financial Strategy Group, said that the details of the suggested reforms were still needed.

"It's certainly moving in the right direction, but it's important to bear in mind that more clarity is needed and that the ultimate credibility of LIBOR will rely on details that have not yet been formalised," he said.

According to Mikhailov, from a LDI perspective the reduction in the number of LIBOR benchmark rates that are submitted would have a limited impact on UK pension schemes, since the majority of the interest rate swaps are benchmarked against three or six months LIBOR.

Barron also pointed out that, because the investigation was still ongoing, it was very difficult to come to any conclusion regarding the potential consequences the manipulation of LIBOR could have on pension schemes and their LDI strategies.

She said it would be difficult to get to the bottom of what the real rate should have been on specific dates when the manipulation took place.

"I guess the real question is what the main focus for pension funds is going to be going forward," she added.

"The main area is going to be looking at the contracts. A lot of pension funds have their own documentation. As a result, in the short term, there is a fair amount of legal work to be done."

Earlier this year, law firm Reynolds Porter Chamberlain (RPC) told IPE that schemes might issue two types of claims against banks involved in the LIBOR manipulation scandal: through a 'breach of contract' claim or a 'misrepresentation' claim.

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