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* Global watchdog set to unveil final guidelines next week
* Singapore, Hong Kong already pursuing their own reforms
* United States and UK disagree over future of Libor
* Huge FX market difficult to regulate
By Anirban Nag and Rachel Armstrong
LONDON/SINGAPORE July 12 (Reuters) - A global blueprintintended to stamp out manipulation of financial benchmarks,expected to be published late next week, risks failure ifindividual countries persist in pursuing their own regimes.
Regulators are expected to unveil final guidelines forimproving transparency and oversight of benchmarks coveringeverything from interest rates to oil and gold.
But the Madrid-based International Organisation ofSecurities Commissions (IOSCO) has no power to enforce itsrecommendations and with Hong Kong and Singapore already forgingahead with their own proposals, the signs are thatimplementation will be patchy.
"There is no global regulatory trade body with a mandatestrong enough to demand a country change its implementation ofthe principles which are, by nature, subject to interpretation,"said Tom White of JWG, a UK-based regulatory think tank.
This could result in different regulators taking differentapproaches, leaving weak spots in the system that could beexploited, he said.
Trust in financial industry benchmarks, central cogs in theglobal economy, has been shattered by revelations last year thattraders had routinely manipulated the London interbank offeredrate (Libor), used to help price some $550 trillion in contractsworldwide, from Spanish mortgages to U.S. credit card bills.
European authorities are also investigating allegations ofprice rigging in the oil market and in Britain, the financialregulator is looking into allegations that traders riggedbenchmark rates on the $5.6 trillion-a-day foreign exchangemarket.
Despite influencing trillions of dollars worth of contracts,many of the world's benchmarks are unregulated and determined bypeople who can profit from their levels.
To minimise the risk of manipulation, IOSCO indicated inApril that it would like benchmarks based on actualtransactions, where possible, rather than estimates. It alsosought more protections for whistle-blowers, a code of conductfor individuals who submit figures for benchmarks and strongerpolicing of institutions that compile and administer rates.
IOSCO's final report will be used by the Financial StabilityBoard, an influential regulatory group headed by Bank of Englandgovernor Mark Carney, to oversee reform of benchmarks in theinterbank market.
But the FSB will not report back until next year and bythen, it may be too late to get individual countries to changereforms already introduced.
ASIA VS EUROPE
Using actual market transactions rather than estimates tocalculate benchmarks, as IOSCO wants, is tough in illiquidmarkets.
Trading in the interbank market has dried up since U.S.investment bank Lehman Brothers collapsed in September 2008 withbanks preferring instead to rely on deposits or cheap loans fromcentral banks to fund their loans.
Regulation also risks undermining a benchmark if it putsbanks and trading houses off making the submissions needed tocompile it.
Trading volumes in Singapore's once-vibrant interest rateand emerging market currency trading desks are way downfollowing probes into rate-fixing and brokers and analystsinterviewed by Reuters said volumes would struggle to recoverany time soon.
After uncovering rate-rigging by more than 100 traders,Singapore has made benchmark manipulation a criminal offense andthe city state will now regulate the setting of key benchmarkssuch as Sibor, the Singapore interbank offer rate.
It will discontinue six benchmark rates and four of theremaining five will be based on actual trade data in the foreignexchange market. Sibor will continue to be based on estimatessubmitted by banks.
In Hong Kong, the city's de facto central bank has awardedthe administration of the interbank lending process to anindustry group headed by its own chief executive and said itwould phase out interbank rates with little demand.
In Japan, where some bank branches were found to be at theheart of the Libor manipulation cases, the country's bankingindustry group said it will tighten monitoring of how itsinterbank lending rates are set.
Regulators in Europe are considering a more radicalapproach.
In Britain, authorities are replacing banking trade body theBritish Bankers Association (BBA) as the administrator of Liborwith NYSE Euronext, the transatlantic exchangesoperator.
The British regulator wants NYSE Euronext to look at ways oftying the Libor rate more closely to actual transactions.
The UK regulator has suggested running a parallel system -one based on bank estimates to support existing contracts and atransaction-based rate for new contracts. But the United States,which wants to ditch the use of estimates altogether, may insiston a transaction-based benchmark for rates used there.
Thomson Reuters, parent of Reuters, has calculatedLibor and distributed the rates on behalf of the BBA since 2005.
In Europe, the authorities are looking at making submissionsfor interbank rates mandatory as a growing list of internationalbanks, including Citi, UBS and Rabobank, have stopped participating in the calculation ofEuribor, the European equivalent of Libor.
Euribor might also be phased out and replaced with a'hybrid' rate which would combine actual transaction prices withestimates to ensure the rate was a valid yardstick when marketvolumes are weak, people familiar with the plans said.
FX MARKET
Even with traded prices underpinning the benchmark,investors may still be wary.
In the spot foreign exchange market, allegations that bankswere using advance knowledge of client orders to try andmanipulate the WM/Reuters benchmark rate, used by investors andcompanies to value their holdings, has prompted an investigationby authorities in the UK.
Traders said trying to regulate the currency markets wouldprove difficult given their large size.
"This market is so huge with all kinds of players rangingfrom Asian central banks to large hedge funds that you will notsee anyone sticking to a code of conduct. You can have a code ofconduct, but the market will chase liquidity (for betterprices)," said a head FX trader at a London-based hedge fund.
Some investors have long suspected that they were beingshort-changed by banks in the foreign exchange market, whererates are calculated hourly and the closing rate is calculatedat 4 pm in London.
To get around that, asset manager Russell Investments openedits own FX desk over a decade ago.
"There's no other market in the world where such largetrades are known hours before they are executed. When we tradeequities, we go to extreme lengths so no-one knows what ouractual trade size is - we will slice it and dice it and use 100different venues to disguise how much we are trading," saidDaniel Birch, head of implementation services at RussellInvestments in Sydney.
"If you are an FX trader and you are fixing at the London4pm you get orders from Australia, New Zealand, Japan, and HongKong that are on your desk for up to eight, nine hours beforeyou execute at the 4pm. So the potential incentive for FXtraders to manipulate this information can be very high."
World Markets Co, a unit of Boston-based State Street Corp., is the administrator for the WM/Reuters service.
Data from Thomson Reuters systems are a primary source ofthe exchange rates used to calculate the benchmarks. WorldMarkets applies its methodology and calculates the benchmark.
