BBA Libor review due Friday

By Ian Chua

LONDON (Reuters) - An annual review on Friday into the way Libor is set is expected to recommend tweaks rather than drastic changes despite concern that the process has become seriously distorted by the global credit crisis.

The British Bankers Association is set to unveil the findings of the review into the leading global interest rate benchmark around 1700 British time.

The hallmark is likely to be caution about reforms so as not to destabilise markets that use London interbank offered rates as a reference.

Trillions of dollars worth of financial derivatives contracts globally like interest rate swaps and Eurodollar futures are referenced to Libor.

Just this week alone, overnight dollar rates have leapt more than 40 basis points as U.S. investment banks hoard as much cash as they can to dress up balance sheets ahead of the end of their second quarter on Friday.

"I do believe that any recommendations will lean towards gradualism," said Mark Capleton, head of European rates strategy at RBS in London.

"The emphasis must be on stability of the system and continuity of contracts because there is a vast outstanding stock of contracts based on these reference values," he said.

Since the credit crisis broke last summer, bank-to-bank borrowing costs have soared as lenders grew wary of lending to one another and the BBA has been facing growing criticism that Libor doesn't accurately reflect those borrowing costs.