By Huw Jones
LONDON (Reuters) - Banks must follow tighter rules in the setting of Libor to fully restore confidence in the interest rate benchmark tarnished by attempted rigging, the body appointed to oversee it said.
The London Interbank Offered Rate, known as Libor, reflects the daily cost of borrowing among banks and is used to price home loans, credit cards and other financial transactions worth more than $350 trillion (242 trillion pounds) globally.
Banks have been fined $20 billion for trying to manipulate the rate, and several quick fixes adopted such as appointing ICE Benchmark Administration (IBA), a wholly-owned subsidiary of Intercontinental Exchange Inc (N:ICE), as an independent administrator for Libor and auditing submissions from banks.
On Friday the IBA published a "roadmap" for making Libor more robust at a time when the Bank of England and the Federal Reserve are pursuing alternatives.
IBA President Finbarr Hutcheson said that by the third quarter of 2016, banks who submit quotes for compiling Libor will have to follow more prescriptive rules defining more clearly the type and location of trades they can submit.
When there are enough actual market transactions available, only these can be submitted, as opposed to a mix of actual quotes and bank estimates.
There are also stricter rules on what banks must do when there are not enough quotes to compile a rate.
The changes follow 18 months of consultation with banks, users of Libor, and central banks from across the world.
The IBA is asking for feedback on a more radical step which involves limiting banks to only providing actual transactions which the administrator itself would use to compile Libor rates. If this were to go ahead it would come into force in 2017.
Together the steps move closer to what regulators in the United States have called for which is a benchmark based purely on market transactions that can be verified, thereby removing any ability for banks to influence the quotes.
Currently a panel of 20 banks submit quotes to compile the 35 variants of Libor, which cover major currencies and durations, and there are no plans to trim the number.
Hutcheson said stricter and clearer rules should ease concerns at banks over legal liabilities following the huge fines, and encourage them to continue helping to compile Libor.
"What we are doing here is trying to reduce the risk profile, to encourage banks to stay for the long term," Hutcheson said.