In future, fewer transactions are likely to be based on the London interbank offered rate (Libor) and regulation could be tightened for all financial benchmarks, including those for oil, gold and stock prices, Martin Wheatley, managing director of the Financial Services Authority, told Reuters.

On Friday, he is due to publish his review of Libor at the request of the British government.

Used as a benchmark for $500 trillion in contracts for everything from home loans to complex financial derivatives, Libor has been under intense scrutiny since British bank Barclays was fined more than $450 million in June by U.S. and UK regulators for rigging it.

Other international banks on the panel that sets Libor rates are also under investigation.

Until now, membership of the panel has been the preserve of a small group of banks, which volunteer daily estimates for the rates at which they would borrow different currencies for different periods to come up with a set of benchmarks.

But Wheatley said providing quotes for Libor could become mandatory to widen the number of banks taking part and improve Libor's credibility.

"Whatever the improvements made to Libor, we will want to consider alternative benchmarks for at least some of the types of transaction that currently rely on Libor," Wheatley said.

It was impossible to replace Libor straight away because so many contracts were linked to it and it might not be possible to replace completely because alternatives are not perfect, he said.

Other changes he suggested included basing Libor rates on actual trades rather than bank estimates. When there aren't changes for a specific rate - a particular problem for longer-term rates - rate setters could use "interpolation" based on the more frequently traded short-term rates.

Stung into action by the threat to its financial industry from a series of scandals, Britain's government ordered a swift review of Libor. Wheatley said it took him two weeks, quipping: "I was on a beach in Spain with an iPad, believe me."

NEW LAW

The industry will have until Sept 7 to respond to the so-called Wheatley Review with final recommendations to be made by the end of next month. Some of those are expected to be enshrined in a new law next year.

"This discussion paper demonstrates that we will give regulators the powers they need to prevent the manipulation of key benchmark rates," financial services minister Mark Hoban said.

The tougher regulation for benchmark interest rates could be extended to stock market indexes and benchmarks for commodity prices, Wheatley said. Although stock indexes are based on trades, the others are often set by panels and less transparent.

"It's the slightly more esoteric ones that have become very important in global markets like gold and oil and other commodities where they are not subject to price or other regulatory oversight," Wheatley said.

The fast-track review reflects the political pressure on governments and regulators on both sides of the Atlantic.

Bank of England governor Mervyn King said on Wednesday that Libor had ceased to work and a fix was needed.

Wheatley said supervision of Libor could be handled by a "college of supervisors" from across the world -- a system common for cross-border banks -- with Britain in the chair.

This may not satisfy other regulators, however.

There have been calls in the United States for a locally supervised alternative to Libor. The European Union has floated the idea of the European Central Bank regulating Euribor, the euro-denominated rate.

Thomson Reuters, parent company of Reuters, calculates and distributes Libor rates on behalf of the British Bankers' Association trade body.

(Editing by Matthew Tostevin)

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