By Huw Jones
LONDON, March 25 (Reuters) - Banks' participation incompiling the Libor benchmark interest rate that was at thecentre of a fixing scandal last year will remain voluntary whennew rules come into force.
Britain's financial watchdog wants to restore credibility toLibor, a benchmark used to price products from home loans tocredit cards worth $300 trillion globally, after some banksadmitted to rigging it.
Regulators across the world are watching to see how theFinancial Services Authority's (FSA) rules, due to come intoforce next month, will work out.
The European Union is considering whether to force banks tohelp compile Euribor, Europe's counterpart to the LondonInterbank Offered Rate (Libor), to safeguard its integrity.
Banks including Dutch lender Rabobank, Switzerland's UBS and U.S.-based Citigroup have said they nolonger wanted to participate in the Euribor-setting process.
Regulators worry that if too many banks drop out, the quotesbanks submit would become unrepresentative and the benchmarkrate could be easily manipulated.
Banks submit an estimate of the rate at which they thinkthey could borrow from another bank and these quotes are used tocompile the benchmark.
The FSA, which put the issue of compulsory participation tobanks last December, said on Monday it was still considering thefeedback.
"These responses broadly agree with our approach thatparticipation in Libor should primarily be on a voluntarybasis," an FSA spokesman said.
"The successful reform of Libor requires the activeparticipation of all key stakeholders," he said.
RESTORING TRUST
The FSA said on Monday its new rules are based on proposalsmade last September for spotting and avoiding manipulation ofLibor.
British banks RBS and Barclays and Swisslender UBS have been fined a total of $2.6 billion fortheir part in the rate-fixing scandal and more are set to bepunished.
"These new rules today should help restore that faith andbring integrity back to Libor," FSA managing director MartinWheatley said in a statement.
The FSA said banks face paying up to 545,000 pounds($831,000) a year to comply and a one-off cost of up to 2.5million pounds for initial systems changes.
But it eased the costs by dropping a proposed requirementfor banks to hire an outside auditor each year to check on theircontrols for submitting quotes. Instead banks must appoint anauditor "on a regular basis".
Banks must still say why a less frequent check would beacceptable.
The FSA will check within the next 12 months to see iflenders are complying.
Some regulators like the U.S. Commodity Futures TradingCommission want a move to alternative benchmarks based on markettransactions rather than quotes from banks. Wheatley believesthere is no practical alternative in the short term.
Thomson Reuters, parent company of Reuters, hasbeen calculating and distributing Libor rates for Libor'ssponsor, the British Bankers' Association, since 2005.
The BBA is being stripped of its sponsor role and a new roleof an administrator for Libor will be created. Theadministrator, which has yet to be appointed, will ensure banksfollow the rules.
Barclays (BARC)