LIBOR AN OVERVIEW ON LIBOR RATES AND LIBOR-BARCLAYS SCANDAL PRESENTED BY: RUPESH SHAH, MMS (FINANCE) 2011084 DSIMS,

Malad

Introduction

An overview of LIBOR What is LIBOR used for? 2012 LIBOR Figures Historical Figures How is LIBOR calculated Problem with LIBOR The Barclays LIBOR fixing scandal LIBOR whats next? Will Libor be scrapped?

What is LIBOR?

London Interbank Offer Rate It is based on rates that contributor banks in London offer each other for inter-bank deposits. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks.
LIBOR and EURIBOR are the most prevalent benchmark reference rates used in Euro, US dollar and Sterling OTC interest rate derivative contracts and exchange traded interest rate contracts.

LIBOR is set every day by the worlds biggest banks. The rate is set based on the previous day borrowing.

What is LIBOR used for? (LIBOR related financial products)

Floating rate corporate loans. Floating rate corporate bonds and asset-backed securities. Variable rate mortgages and consumer loans. Interest rate swaps. Cross-currency swaps. Futures and Options Contracts. Funding leg of leveraged products: total return swaps; equity derivatives; contracts for difference.

2012 Libor rate figures

On 27th and 20th June, the rate was at 0.90-percent. On 13th and 6th June, the rate was at 0.99-percent. On 26th, 19th, 12th and 5th January, the rate was on peak at 1.09-percent.

In September 2009, the rate dropped to the lowest level of 0.54percent.

It then stabilized around 0.60-percent, which was a 10-point basis gap from the base rate of 0.50-percent. In the autumn of 2008, the gap increased massively but normalized in the late 2009.

How is LIBOR calculated? such as time, maturity Rate calculations are complex as they incorporate variables
and currency rates.
Calculated on a daily basis each contributor bank formulates their own rates and

submits to Thomson Reuters and British Bankers Association.

Panel consists of 18 banks. Submissions based on the following question: At what rate could you borrow funds, were you to do so by asking for and then accepting

inter-bank offers in a reasonable market size just prior to 11.00 a.m.?

The submissions are based on the lowest perceived rate at which a bank could

obtain funding in a reasonable market size in the London interbank money market, for a given maturity and currency.

Submissions made across 15 maturities (ranging from overnight to 12 months) in 10 different currencies.
Top four and bottom four submissions are discarded. Remaining contributions are then averaged to create LIBOR.

Submissions of all the participants are published along with each days LIBOR fix.

Foreign Exchange and money market committee

Problem with LIBOR

It is subjective a bankers poll, not a statistical measure. Based on estimates, not actual prices banks have lent at. No reporting of actual rates for inter-bank lending. Single bank should not be able to influence LIBOR significantly.

In times of funding stress, no bank wants to stand out from the rest. All banks might be tempted to submit artificially low LIBOR estimates to avoid being seen as risky.

Yin and Yang of LIBOR: Rate Manipulation Scandal

The contrary forces are interconnected or interdependent with each other

What is the Scandal about? How Huge is its Impact? How is the Issue being Resolved?

Barclays LIBOR fixing scandal

June 2012:

fined a total of 290 million; US Commodity Futures Trading Commission (CFTC) - 128 million; US Department of Justice - 102 million; FSA - 59.5 million biggest fine ever (despite 30% reduction for Barclays cooperation).
Barclays admitted misconduct by breaching four of FSAs Principles for Business:

1)Inappropriate submissions following requests by derivative traders; 2)inappropriate submissions to avoid negative media comment; 3)systems and controls failings; 4)compliance failings.

In April 2008: a senior Barclays treasury manager told BBA that Barclays was not reporting accurately; a Barclays manager told the FSA that it was understating its LIBOR submissions. Evidence of Barclays manipulating LIBOR since 2005 (derivatives). CFTC investigation commenced in May 2008. CFTC enlisted FSA by Spring 2010. Possibly up to 19 other institutions under investigation by regulators on 3 continents. Falling share prices of banks. RBS sacked 4 employees in Autumn 2011. UBS and Citigroup been disciplined by Japanese regulators for manipulating TIBOR in December 2011.

Resignations: Marcus Agius (Chairman); Bob Diamond (CEO); Jerry del Missier (COO). SFO investigation started in July 2012. Possibility of: criminal prosecutions against Barclays employees; directors disqualification proceedings against senior directors of Barclays; OFT and/or EU Commission anti-competitive practices claims; civil claims (some already commenced in US).

LIBOR whats next?

More FSA/CFTC fines against other banks? Potential regulatory action in other European and Asian jurisdictions. Criminal prosecutions or directors disqualification proceedings may be commenced (long way off). Raft of civil claims, particularly class actions in US (more difficult to launch collective actions in Europe), but demonstrating causation and quantifying losses could be fraught with difficulty.

Will Libor be scrapped?

Possibly. Central bankers discuss in September whether Libor can be fixed, or whether something less vulnerable to abuse can be substituted.

GCF index

In the US, the Depository Trust & Clearing Corporations General Collateral Finance Repo Index, which launched in 2010, is increasingly viewed as a credible alternative to Libor, as it is calculated using fully collateralised and cleared repo transactions in Treasuries, agencies and agency mortgagebacked securities.

Thank You