LIBOR: time to change bets
The key LIBOR rate for credit markets is going to be modernized. City of London, New York Wall Street and regulators on both sides of the Atlantic are seeking a compromise in defining rules for calculating the global interbank rate systemic for institutionalized global usury. LIBOR replacement is planned for next year.
LIBOR (London Interbank Offered Rate) – the initial rate that is used on the interbank market, as well as in international commercial agreements to determine the interest on borrowed money. It was adopted in the 84th year and since then has not undergone any special changes.
LIBOR is set daily by the British Banking Association (BBA) for loans in ten currencies. Survey data from 16 largest banks are used to determine the rate. Every day in the morning, banks inform about the rates at which loans in foreign currency are provided. In this case, the four highest and four lowest rates are cut off, and the arithmetic average is calculated for the remaining eight. She becomes the rate of the day. The rate is calculated both for a day, that is, until 12:00 of the next business day, and for weeks, months and a year.
Last summer, manipulations by banks were revealed that intentionally provided distorted information to raise or lower rates
This was done not only in order to increase or decrease the price of borrowed money in the interests of bankers, but also to receive additional profits from trading in derivative financial instruments – derivatives. Given the huge volumes of this market, the movement of rates at hundredths of a percent could bring millions in profits.
According to the results of investigations of actions – Barclays, RBS and UBS, these three banks paid about $ 2.5 billion in fines. Investigations are ongoing and financial institutions have fined more than $ 20 billion.
The peculiarity of LIBOR is not only that they are guided by it when determining a number of bank rates. It is tied to numerous derivative financial product contracts worth $ 150 trillion and loan contracts with a floating interest rate around the world of about 350 trillion. For this reason, sudden movements in relation to the current rate are contraindicated. At the same time, American regulators insist on its thoughtful replacement with another indicator, while the British consider it possible to improve the existing scheme.
According to London, the calculation of the surveys of the largest banks can be corrected by real-time indices based on data on the rates of other banks at which they conduct current transactions.
Representatives of US regulators note that LIBOR cannot perform the function of a market indicator, since banks that participate in the calculation may not enter the market at all with declared rates. In the USA, they insist that it is necessary to focus on actual transactions, the index should be calculated based on ongoing transactions. The same opinion is shared by the International Organization of Securities Market Regulators IOSCO. “If a bet has outlived itself, it should cease to exist,” said Gary Gensler, chairman of the U.S. Commodity Exchange Commission, in an interview with the Financial Times.
The head of the just-created in the UK Office of Financial Conduct Martin Wheatley articulates the British position. In his opinion, only a “parallel approach” with a combination of the principles of the formation of the previous LIBOR and current market indicators will ensure continuity for contract holders based on the current rate.
The British also express doubts about the future representativeness of data on current transactions, saying that some banks will not want to share the details of bilateral operations. Players may split up large transactions due to a reluctance to provide information about them, or they will be concluded with subsequent planned cancellation. The British make it clear that manipulation is possible and when taking into account actual transactions on the interbank market and there is no panacea for fraud.