The winning subsidiary known as NYSE Euronext Rate Administration Limited is scheduled to complete the transfer by 2014.
July 11,2013 : International Finance Magazine reports on the takeover of the traditional rate setter by an independent private company and a threadbare analysis of how the new mechanism shall prevent fraudulent rate setting by elite banks and the reforms of the benchmark rate setting process.
NYSE, Euronext has been awarded the contract by the U.K government to run the London interbank offered rate contract after the benchmark interbank lending rate was stigmatized by a rate rigging scandal that saw banks fined for fixing the rates and individual traders put on trial.
NYSE Euronext announced that a new subsidiary will improve the reliability of LIBOR, which is in the focus for its alleged irregularities in bank rate rigging and fined billions of dollars for irregularities.
Finbar Hutcheson, CEO of a NYSE subsidiary based in London said the group looked forward to “continuing the process of restoring credibility, trust and integrity of LIBOR as a key labor benchmark”. The winning subsidiary known as NYSE Euronext Rate Administration Limited is scheduled to complete the transfer by 2014. The company is confident of returning credibility through its long regulatory experience and market lending technical ability to return confidence to scandal hit LIBOR. The rates set by the British Banker’s Association, represents the rate at which global banks operating in London estimate they would expect to pay for short term loan for each other in different world currencies. Royal Bank of Scotland, UBS and Barclays banks have been accused for rigging the bank rates and manipulating the benchmark, the banks have been fined more than 2.6 billion dollars collectively.
The Financial Conduct Authority will supervise the LIBOR administrator and the rate setting process, this comes after U.K. amended its Financial Services Act to include LIBOR under its gambit as on April 1st, 2013.
Revised rate setting process
LIBOR will continue to be set by surveying a panel of banks about the rates at which they think they can borrow, atleast for the short term. Chief of FCA, Martin Wheatley has said he wants the new administrator to lead the process of finding ways to tie the rates more closely to the actual transactions and not take into account individual views of certain banks and wreaking havoc with the $ 300 trillion existing contracts tied to the LIBOR rate. The likely solution may be to run two parallel rates, one based on surveys to support the existing book and a transaction based rate for new contracts.
“The shift to NYSE Euronext signals diversification amid diminishing trade volumes and revenues in traditional exchange functions, this is a fantastic example of corporate evolution, this also shows how the NYSE is moving beyond equity to being a full fledged financial services organization”, said James Angel, a finance professor at George Town University’s McDonough School of Business.
He further opined “The transfer represents just the first step. Step two will be coming up with a measure that cannot be manipulated with the current one was”
Mr.Wheatley’s report specified that the new administrator should be a private company whose primary responsibility was to distribute, compile and police the daily rate fixation process. The report also acknowledged that the winner was allowed to explore the commercial viability of the rate, the new administrator will be closely monitored by the FCA.
The LIBOR setting process has been widely criticized because it is based on estimates submitted by a small group of bankers, who use the opportunity to rig the rates to enhance their business interests, rather than relying on known and transparent financial standards. The London Interbank Offered Rate, is the rate at which banks lend to one another, and is used as a base for calculating the price of financial products globally.