The Institute of Chartered Accountants in England and Wales plans to develop guidance for auditors on providing assurance on interest rate benchmarks in the wake of the outcry over manipulation of the LIBOR, or London Inter-Bank Offered Rate, which cost the jobs of top executives at the British bank Barclays.
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The initiative will be led by ICAEW’s Financial Services Faculty and comes in response to the recent scandal over manipulation by banks of important interest rate benchmarks such as LIBOR and EURIBOR and the consequent damage to market confidence.
“It is important to restore trust in these benchmarks, given the important role they play in establishing rates for many loans and market transactions,” said Iain Coke, head of the ICAEW’s Financial Services Faculty, in a statement Thursday. “External assurance can help provide that trust by testing that there are robust processes in banks for submitting rates to form the benchmark and that those processes are being followed.”
Various reviews are underway into strengthening interest rate benchmarks, including the Wheatley Review in the United Kingdom and other reviews at global, European and national levels. While the outcomes of these reviews have yet to be determined, external assurance should be one of the options available to regulators and benchmark setters.
In 2008, the Federal Reserve Bank of New York recommended that governance over LIBOR should be strengthened, including by requiring external assurance on banks’ LIBOR submissions. Establishing guidance, based upon international standards, will support this by bringing consistency to issues such as the form of reporting and expectations of auditors undertaking these assignments, the ICAEW noted.
The U.S. Commodities and Futures Trading Commission, in its settlement with Barclays, demanded that Barclays’ interest rate benchmark submissions be subject to external assurance. A number of other banks, including major banks in the U.S., are also reportedly under investigation for interest rate benchmark manipulation. Other banks may also be subject to similar requirements. Banks not subject to such settlements may choose to obtain assurance to promote public confidence in their own submissions, even if this is not mandated by changes in governance requirements over benchmark submissions.
“We expect regulators to increasingly demand independent assurance on important market benchmarks, such as LIBOR,” said Coke. “This is a global issue and, by developing this guidance, we hope to help auditors take a consistent approach whichever rate and whichever markets they operate in.”
ICAEW aims to issue an exposure draft of guidance by the end of 2012. It will be developed by a working party, chaired by Mike Lloyd, a bank audit partner at Deloitte and chairman of the ICAEW’s banking committee. The ICAEW said it would seek views from a range of stakeholders in developing this guidance, including regulators such as the CFTC and the Financial Services Authority.