LONDON Banks' participation in compiling the Libor benchmark interest rate that was at the centre of a fixing scandal last year will remain voluntary when new rules come into force.
Britain's financial watchdog wants to restore credibility to Libor, a benchmark used to price products from home loans to credit cards worth $300 trillion (197.5 trillion pounds) globally, after some banks admitted to rigging it.
Regulators across the world are watching to see how the Financial Services Authority's (FSA) rules, due to come into force next month, will work out.
The European Union is considering whether to force banks to help compile Euribor, Europe's counterpart to the London Interbank Offered Rate (Libor), to safeguard its integrity.
Banks including Dutch lender Rabobank, Switzerland's UBS UBSN.VX and U.S.-based Citigroup (C.N) have said they no longer wanted to participate in the Euribor-setting process.
Regulators worry that if too many banks drop out, the quotes banks submit would become unrepresentative and the benchmark rate could be easily manipulated.
Banks submit an estimate of the rate at which they think they could borrow from another bank and these quotes are used to compile the benchmark.
The FSA, which put the issue of compulsory participation to banks last December, said on Monday it was still considering the feedback.
"These responses broadly agree with our approach that participation in Libor should primarily be on a voluntary basis," an FSA spokesman said.
"The successful reform of Libor requires the active participation of all key stakeholders," he said.
The FSA said on Monday its new rules are based on proposals made last September for spotting and avoiding manipulation of Libor.
British banks RBS (RBS.L) and Barclays (BARC.L) and Swiss lender UBS UBSN.VX have been fined a total of $2.6 billion for their part in the rate-fixing scandal and more are set to be punished.
"These new rules today should help restore that faith and bring integrity back to Libor," FSA managing director Martin Wheatley said in a statement.
The FSA said banks face paying up to 545,000 pounds a year to comply and a one-off cost of up to 2.5 million pounds for initial systems changes.
But it eased the costs by dropping a proposed requirement for banks to hire an outside auditor each year to check on their controls for submitting quotes. Instead banks must appoint an auditor "on a regular basis".
Banks must still say why a less frequent check would be acceptable.
The FSA will check within the next 12 months to see if lenders are complying.
Some regulators like the U.S. Commodity Futures Trading Commission want a move to alternative benchmarks based on market transactions rather than quotes from banks. Wheatley believes there is no practical alternative in the short term.
Thomson Reuters (TRI.TO), parent company of Reuters, has been calculating and distributing Libor rates for Libor's sponsor, the British Bankers' Association, since 2005.
The BBA is being stripped of its sponsor role and a new role of an administrator for Libor will be created. The administrator, which has yet to be appointed, will ensure banks follow the rules.
(Reporting by Huw Jones; Editing by Erica Billingham)