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 1^st, 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.

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 June 19, 2013 : International Finance Magazine gives you the story on LIBOR manipulation and the impact of the Financial Services Act 2012 which has given more powers to exert pressure on banks which do not have adequate risk management and controls; the article also explains how LIBOR is calculated and its importance worldwide.

The U.K. market regulator has increased the fines for risk management failings by more than seven times, according to a report by the Chartered Institute of Internal Auditors.  The Financial Conduct Authority has levied a fine of 292 million pounds ($ 458 million) in fines against firms that did not have adequate risk management and controls in 2012. In 2011 the regulator had levied a fine of 38 million pounds.

Ian Peters, CEO of CIIA, said “The financial crisis and LIBOR scandals, interest rate swaps mis-selling have underlined how easily weak internal controls can lead to inappropriate conduct and, at the extreme, even let potentially criminal practices go unnoticed”. FSA had fined Barclays Plc, UK’s second biggest bank, about 60 million pounds for attempting to manipulate LIBOR.

LIBOR

The term LIBOR has been extensively used in the past few weeks in the U.K. and Singapore. The LIBOR manipulation has already cost the CEO of Barclays Bank of his job. Singapore’s Central Bank had also rapped up 20 banks and censored them for insufficient risk management and internal controls which allowed traders to alter the rates. James. J. Angel, Associate Professor of Finance, Georgetown University, provides expert insights on LIBOR and the increasing crackdown on manipulation of LIBOR norms.

LIBOR stands for London Interbank Offered Rate. It is the rate at which banks are able to borrow money from each other. An agency called by the name British Bankers Association surveys a group of banks everyday and asks them, if you were to borrow money at 11 A.M, London time what would you pay for it. After taking the submissions the BBA averages the inter-bank interest rates being offered by its membership. LIBOR is calculated and published by Thomson Reuters on behalf of the British Bankers Association (BBA). LIBOR rates vary for different currencies and different maturities. For example a bank would have a daily rate for how much it would cost to get a 30 day dollar loan, 60 day UK pound loan and a 90 day Japanese Yen Loan. It is the standard rate for computing an interest rate in all the major currencies and in different maturities. It is set in about 10 currencies and for each one there is one, three, six and twelve month maturity with many in between. The official LIBOR rates are announced everyday at 11:45 A.M. London time by Thomson Reuters on behalf of the British Bankers Association. It is viewed as the most important benchmark in the world for short term interest rates. In the financial markets LIBOR rates are used as the base rate for a large number of financial products such as futures, options and swaps. Banks also use the rates as base rates for setting the interest rates on loans, savings and mortgages. Since, LIBOR rates are treated as the base rate for other products including stocks, this is the reason why it is monitored with great interest and by a large number of individuals worldwide.

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