Changes

Jump to: navigation, search

LIBOR

1,928 bytes added, 21:33, 8 February 2019
The London Interbank Offered Rate (LIBOR) is the interest rate that banks charge each other to borrow short-term on the London interbank market. LIBOR is also the broader financial world's benchmark for setting [[short-term interest rates]] for products like variable-rate mortgages and corporate loans.
Libor is referenced for interest payments on about $350 trillion in notional value of derivative contracts and at least $10 trillion in loans. Now known as ICE Libor, it is currently administered by the [[ICE Benchmark Administration]] and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. The most commonly quoted rate is the three-month U.S. dollar rate.
Since the time of From its launch in 1986until 2013, the rate was compiled and published by the [[British Bankers Association]] (BBA). However, after a manipulation scandal authorities found in 2012 that started as early as 2005 and implicated more than a dozen big some bankswere manipulating it, investor confidence in the accuracy of LIBOR plummeted, leading the UK regulatory panel to strip the BBA of its role in setting LIBOR.<ref>{{cite web|url=http://www.forbes.com/sites/halahtouryalai/2013/07/09/not-so-fast-libor-manipulation-still-a-threat-under-nyse-euronext-takeover/|name=Not So Fast, Libor Manipulation Still A Threat Under NYSE Euronext Takeover|org=Forbes|date=July 10, 2013}}</ref> In July 2013, it was announced that [[NYSE Euronext]] had won the contract to "administer and improve" the benchmark rate.<ref>{{cite web|url=http://dealbook.nytimes.com/2013/07/09/nyse-euronext-to-take-over-libor/|name=NYSE EuroNext to Take Over Administration of Libor|org=New York Times Dealbook|date=July 10, 2013}}</ref> [[ICE]] acquired the NYSE Euronext Rate Administration, the name given to the division created to administer the benchmark rate, when it bought NYSE Euronext in 2013. ICE then re-named it the [[ICE Benchmark Administration]]. In response to the Libor concerns, the Financial Stability Oversight Council and Financial Stability Board called for the development of alternative interest rate benchmarks. In 2014, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify best practices for alternative reference rates, and it created a new benchmark, the Secured Overnight Financing Rate ([[SOFR]]) as the best rate for use in certain new U.S. dollar derivatives and other financial contracts. It also published its Paced Transition Plan, with specific steps and timelines designed to encourage adoption of the SOFR.<ref>{{cite web|url=https://www.newyorkfed.org/arrc|name=About Us|org=ARRC|date=February 8, 2019}}</ref> SOFR has already been used for a handful of bond offerings by large institutions including the World Bank, MetLife and Fannie Mae. Central banks in Britain, the euro zone, Japan and Switzerland are also constructing new benchmark rates.<ref>{{cite web|url=https://www.economist.com/finance-and-economics/2018/09/27/a-scramble-to-replace-libor-is-under-way|name=A scramble to replace LIBOR is under way|org=The Economist|date=February 8, 2019}}</ref>
==Brief background==
Its The Libor benchmark was set up by the British Bankers Association in 1986 as a way of pricing syndicated loans and interest-rate swaps.<ref>{{cite web|url=https://www.bloomberg.com/news/articles/2017-07-27/what-is-libor-and-why-it-will-soon-be-history-quicktake-q-a|name=Libor's Fall And Why Yawns Are Worse Than Scandal: QuickTake Q&A|org=Bloomberg|date=July 27, 2017}}</ref> Libor's rate-setting mechanism involves using a reference panel of bankers, who each submit a rate based on perceived fair value pricing. BBA would then compile the list and publish the LIBOR rate at 11:00 am GMT daily. LIBOR loans are priced in [[Eurodollars]] - U.S. dollars in foreign hands - and can mature in as little as 24 hours. It is used as a reference rate for key financial products like interest rate [[swaps]], short-term [[interest rate futures]], credit default swaps and [[forex]] rates.<ref>{{cite web|url=http://www.bbalibor.com/bbalibor-explained/faqs|name=BBA LIBOR - Frequently asked questions|org=BBA|date=February 9, 2012}}</ref>
Futures and options contracts on the LIBOR are a key component of the [[CME Group interest rate products]] suite, and are especially attractive to fixed interest money managers looking to hedge their short-term interest rate risk.<ref>{{cite web|url=http://www.cmegroup.com/trading/interest-rates/stir/1-month-libor_contract_specifications.html|name=CME LIBOR Futures|org=CME Group|date=February 9, 2012}}</ref> The CME lists 12 consecutive one-month LIBOR futures contracts that trade most actively near the quarterly expiration months of CME [[Eurodollar futures]]. More than 1.5 million LIBOR futures contracts trade daily on the [[CME]].
== LIBOR manipulation ==
In February 2012, more than a dozen traders and brokers in London and Asia lost their jobs, were suspended or were put on leave, as a result of a probe into the LIBOR system. The allegations included a year of LIBOR price manipulation by major institutions, including [[Deutsche Bank]], [[JPMorgan Chase]], [[Royal Bank of Scotland]] and [[Citigroup]]. Inter-dealer broker [[Icap]] also suspended one employee and put two on administrative leave following the allegations.<ref>{{cite web|url=http://www.telegraph.co.uk/finance/financialcrisis/9071169/Libor-investigaton-traders-fired-and-suspended-report.html|name=Libor investigation: traders fired and suspended - report|org=Telegraph|date=February 9, 2012}}</ref> U.S. and UK regulators requested information from Icap, as well as two other major [[inter-dealer broker]]s, [[Tullett Prebon]] and [[RP Martin]], hoping to uncover data regarding information sharing among brokers, hedge funds and banks.<ref>{{cite web|url=http://www.ft.com/intl/cms/s/0/7021cdb4-527a-11e1-ae2c-00144feabdc0.html#axzz1ltyaYRvj|name=Brokers suspended in Libor inquiry|org=Financial Times|date=February 8, 2012}}</ref>
The first fines related to the scandal were assessed in July 2012 to [[Barclays]]. The fines, which totaled about $450 million, were issued by the [[U.K. Financial Services Authority]], the [[Commodity Futures Trading Commission]] and the U.S. Department of Justice. <ref>{{cite web|url=http://www.bbc.co.uk/news/business-19276506|name=Libor scandal: Seven banks face US questioning|org=BBC|date=February 21, 2013}}</ref> [[UBS]] and the [[Royal Bank of Scotland]] (RBS) were also assessed fines in 2012 of $1.5 billion and $600 million, respectively. In January 2013, the [[International Organization of Securities Commissions]] (IOSCO) issued a consultation and request for comment on changes to the regulation of financial benchmarks such as LIBOR.<ref>{{cite web|url=http://www.iosco.org/news/pdf/IOSCONEWS262.pdf|name=IOSCO Consults on Financial Benchmarks|org=IOSCO|date=February 21, 2013}}</ref>
The manipulation scandal dates back to before the [[financial crisis of 2008]] when, leading up to this volatile period, numerous financial institutions were having difficulty obtaining short-term funding. Because LIBOR is set by member banks and involves individual submission of observed rates, rather than based on actual transactions, it was suggested that the daily rate fix is subject to manipulation. In the [[CFTC]]'s charges against Barclays, the commission found that the bank "routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition."<ref>{{cite web|url=http://www.cftc.gov/PressRoom/PressReleases/pr6289-12|name=CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates|org=CFTC|date=February 21, 2013}}</ref>
In 2008, U.S. bankers and investors complained that the LIBOR rate remained higher than it should have been, and charged that the way it is calculated is was somehow flawed.<ref>{{cite web|url=http://oldprof.typepad.com/a_dash_of_insight/2008/04/understanding-l.html|name=Understanding LIBOR|org=A Dash of Insight|date=May 7, 2008}}</ref> The rate spiked again in late April 2008 on news that the BBA was investigating whether banks had, in fact, been deliberately under-reporting the interbank rates they had been paying.<ref>{{cite web|url=http://www.economist.com/finance/displaystory.cfm?story_id=11088888|name=Bankers' trust|org=The Economist|date=May 7, 2008}}</ref>
Some observers pointed to the widening spread between LIBOR and the [[overnight indexed swap]] (OIS) rate - an indicator of expected [[central bank]] interest rates - as evidence that LIBOR is too high. Others said credit fears are not the problem, since banks' [[credit-default swap]] (CDS) premiums had been falling. As a result, the [[Bank of England]] in April 2008 introduced a [[Special Liquidity Scheme]] allowing banks to swap [[asset-backed securities]] for 9-month [[treasury bills]] to raise [[liquidity]] in the LIBOR market.