1.

The late 1960s saw the creation of LIBOR, which was later used as a universal benchmark
for numerous financial instruments. It is based on a poll of banks who make up a panel that
they ask to indicate their anticipated borrowing costs for various currencies and tenors. A
panel of banks that report their rates daily are used to calculate LIBOR by averaging their
estimations. Numerous financial contracts, including loans, derivatives, futures, swaps and
securities, use it as a reference rate. It has an impact on the interest rates that millions of
customers and companies throughout the world pay. Although the estimations are said to be
based on actual interbank transactions, in practise they are frequently arbitrary and affected
by a number of factors. The top London-based banks construct LIBOR using data for five
distinct currencies—the US dollar, the euro, the British pound, the Japanese yen, and the
Swiss franc—for loan maturities ranging from overnight to twelve months (Coulter, Shapiro,
& Zimmerman, 2018).

Since many market participants use LIBOR or its relatives as an input for pricing and
hedging, LIBOR is significant for international finance since it makes cross-border and cross-
currency transactions easier (Schrimpf, & Sushko, 2019). As a formal form of arbitration,
LIBOR acts as an impartial and common reference point for financial transactions involving
various parties, currencies, and maturities. By allowing the transfer of risk and exposure to
interest rate volatility, it contributes to reducing uncertainty and facilitating circulation in the
financial markets. In addition to serving as a global referent for financial commodities,
LIBOR also serves as a commodity in and of itself. It combines and connects many and
intricate financial markets and instruments under a standardised framework. Even while it is
based on arbitrary estimations rather than actual transactions, it still accurately reflects the
reality of the credit market conditions (Ashton & Christophers, 2015).

2a)

The main stakeholders that affected by the rate-rigging scandal is the bank that participated in
manipulation of LIBOR, such as Barclays, UBS and RBS. They broke the regulations and
guidelines established by the BBA, the FSA, the CFTC, and other organisations that regulate
the LIBOR process and the financial markets. Their unethical, illegal, and corrupt behavior,
including falsifying submissions, collaborating with other banks and brokers, and disobeying
internal controls and procedures, was exposed by regulatory investigations. They were one of
the banks that manipulated the LIBOR and EURIBOR rates during the global financial crisis
for their own gain and to preserve their good name. They had to deal with legal repercussions
like huge fines, criminal charges, reputational harm, and forced resignations of senior
executives (McConnell, 2013).

Another main stakeholders are borrowers and lenders who take out loans, mortgages, credit
cards, and other forms of financial credit and utilise LIBOR as their benchmark interest rate.
During the financial crisis, some banks manipulated Libor by reporting erroneous or low
estimates of their borrowing costs in an effort to boost their own trading positions or come off
as more creditworthy (Strotkamp, 2018). Depending on whether LIBOR was artificially
inflated or deflated, they may have paid more or less interest than they should have. When
LIBOR rates increase or are artificially forced higher, borrowers that pay variable rate
interest will suffer. When LIBOR rates decline or are artificially pushed lower, lenders who
are getting variable rate interest will suffer too. For example, Freddie Mac and Fannie Mae,
suffered enormous financial losses as a result of LIBOR rigging (McConnell, 2013).

2b)

LIBOR has some flaws including being out-of-date, and illiquid. Short-term, unsecured
interest rates, which are not very dependable or transparent, constitute the foundation of
LIBOR. A credit risk premium is also included in LIBOR, which is more discretionary
(Wagner & Ruhe, 2018). LIBOR is a qualitative and subjective procedure that relies on the
judgments of specialists from contributing institutions, who may be swayed by institutional
or personal incentives (McConnell, 2013). Thus, LIBOR creates a conflict of interest. Banks
are urged to stop making LIBOR loans after December 2021 because LIBOR will end at the
end of June 2023. This is because authorities have voiced worries about LIBOR's
sustainability and integrity since the market that underlies it has grown less active and
representative over time (Wagner & Ruhe, 2018). The New York State Assembly helped ease
the transition from LIBOR to SOFR by passing a statute in March 2021 that required
contracts that reference LIBOR to utilise SOFR plus a spread adjustment after June 30, 2023
(Wagner & Ruhe, 2018). The Secured Overnight Financing Rate (SOFR), a proposed LIBOR
substitute. is a secured rate that is less susceptible to manipulation than LIBOR and is
computed as a volume-weighted median of transaction level tri-party repo data (Taylor-Brill,
2020).

Since SOFR is transaction-based rather than LIBOR, which is based on bank survey
responses, manipulation of SOFR would be much more expensive. SOFR is calculated from
actual transactions with an average daily volume of over $1 trillion, unlike LIBOR, which is
based on bank experts' opinions that are frequently not supported by observable transactions.
Being a secured rate, SOFR represents the cost of borrowing using Treasury securities as
security. Compared to LIBOR, which is an unsecured rate and susceptible to credit risk and
liquidity risk, this makes it more stable and trustworthy. In comparison to LIBOR, which has
previously been the subject of scandals and investigations, SOFR is more open and less likely
to be manipulated. The Alternative Reference Rates Committee (ARRC) recommends SOFR
as a LIBOR substitute, and the Federal Reserve concurs. Compared to other possible
alternatives, this offers it more legitimacy and credibility (Taylor-Brill, 2020).

2c)

It has created structural conflicts of interest, bank conflicts of interest and individuals’
conflicts of interest. A structural conflict of interest refers to how the LIBOR process was
organised, which includes several banks with prominent market positions and a stake in
promoting London as a global financial centre. The LIBOR procedure was dependent on
submitters' arbitrary and speculative predictions, which weren't necessarily based on actual
transactions or market conditions. Because of this, submitters were able to manipulate the
rates to suit their own or their traders' objectives. For instance, transparency in the process
made it simpler for manipulators to take advantage of it because they could see what other
banks were submitting and modify their own accordingly and it did not accurately reflect
interbank market transactions and liquidity, particularly for specific currencies and maturities.
The Bank of England and the contributing banks self-regulate the LIBOR process because
there is insufficient oversight and accountability, whereas the FX&MMC Committee, which
is chosen from the LIBOR Panel Banks and User Groups, oversees monitoring and resolving
any problems with the LIBOR submission process (McConnell, 2013).
Besides that, bank conflict of interest is used to describe the circumstance in which the banks
that participated in the LIBOR process were also the ones that engaged in significant trading
in derivatives connected to the LIBOR, such as interest rate swaps. It compelled them to
submit erroneous or biassed estimates or to work with other banks or broker-dealers, in order
to manipulate LIBOR rates in their favour. Even though banks have implemented internal
policies like "Chinese walls" to address this conflict, open telephone conversations, e-mail,
and instant messaging programmes can easily get around these barriers to allow
communication between submitters and traders. Internal controls, regulations, and
compliance functions at the banks did not sufficiently handle these conflicts of interest, and
as a result, submitters' and traders' misbehaviour went undetected, unreported, or unreported
(McConnell, 2013).

Individual conflicts of interest occur when submitters or traders may stand to gain from
manipulating LIBOR rates because they are aware of the positions or trading activities of
their bank. Large derivatives holdings held by some traders made them dependent on the
movement of LIBOR rates, giving them an incentive to manipulate the rates to their benefit
by pressing or requesting submitters to inflate their estimates. To coordinate their operations
and communicate private and competitive information, the individuals participating in the
manipulation conspired with brokers and submitters from other institutions as well as with
one another. This went against the ideas of honest competition and market integrity. Some
traders engaged in wash deals, which produce financial nullities, to increase brokerage
commissions and pay brokers for aiding them in their manipulative behaviour (McConnell,
2013).

3)

The first CFAI standard that was likely breached by the bank practitioners in this case is
Standard I (C): Misrepresentation. It means that members and candidates are not permitted to
intentionally misrepresent investment research, advice, decisions, or other professional
activity. Investment professionals who make false or misleading representations endanger the
integrity of the capital markets in addition to harming investors and eroding investor
confidence in the industry (CFA Institute, 2019). In this case, to manipulate LIBOR rates in
their favour, they conspired with submitters and brokers, frequently via electronic messaging
services like emails and instant messages. They conspired with one another to manipulate the
LIBOR fixing procedure and profit from their trading positions, misleading the BBA,
Thomson Reuters which is a “designated calculation agent”, and other market participants.
They also took advantage of the transparency of the LIBOR process, which allowed the
public to view each bank's individual entries on the same day. By giving incorrect or
erroneous information regarding interbank borrowing rates and market conditions, they
deceived their clients, counterparties, regulators, and the public (McConnell, 2013).

The second CFAI standard that was likely breached by the bank practitioners in this case is
Standard III(A): Loyalty, Prudence, and Care. In addition to acting responsibly and using
sound judgment, Members and Candidates have a duty of loyalty to their clients. Members
and Candidates are required to act in the best interests of their clients and put those interests
ahead of their employer's or own. Investment decisions must be made solely in the client's
best interest and in a way that the member or candidate considers to be appropriate
considering the available facts and circumstances (CFA Institute, 2019). In this case, bank
practitioners manipulated the LIBOR rates to advance their own trading positions or the
interests of their employers, as opposed to working in the best interests of their clients and
putting their client's needs before their own. This demonstrates a lack of devotion and
concern for the customers who rely on LIBOR's precision and honesty. The conflicts of
interest brought on by the bank practitioners' dual responsibilities as traders of derivatives
and contributors to LIBOR, encouraged them to manipulate benchmark rates. Bank
practitioners "did not disclose or manage the conflicts of interest" that would have
jeopardized their objectivity and allegiance to their clients (McConnell, 2013).

The third CFAI standard that was likely breached by the bank practitioners in this case is
Standard I(D): Misconduct. Members and Candidates are prohibited from engaging in any
professional behaviour that involves dishonesty, fraud, or deceit, as well as from taking any
action that could harm their professional standing, integrity, or competence (CFA Institute,
2019). In this case, transcripts of discussions between traders, LIBOR submitters, and brokers
demonstrate the widespread unlawful behaviour that has been their standard mode of
operation. These actions included assisting requests from their employees or allies, making
requests that favoured their trading positions, and conspiring with other banks or brokers to
manipulate LIBOR rates. These are some instances of professional behaviour that involved
dishonesty, fraud, and deception and negatively impacted their competence, professionalism,
and integrity. Certain banks were aware of potential conflicts of interest and manipulation of
the LIBOR process but took no action to stop it. Some banks' creators were also traders or
were under the influence of traders. This also proved that they have violated this standard
(McConnell, 2013).

4a)

LIBOR scandals have brought a lot of negative impact to the global banks. The incident
revealed the collaboration and corruption among traders, submitters, and brokers in addition
to the banks' and the Libor administrator's inadequate controls, compliance, and governance
(Strotkamp, 2018). The article presents evidence in the form of phone conversations,
transcripts, orders, and emails demonstrating how the banks manipulated the Libor in order to
profit from derivative deals or to deflect attention from the media (McConnell, 2013). The
controversy made certain banks and traders who had been manipulating the benchmark rate
for personal gain look dishonest and unethical. This diminished public confidence in the
banking sector's regulation and its reputation. The controversy also called into question the
integrity and efficacy of the financial market’s supervision and LIBOR-setting procedures.
Moreover, the controversy led to a flurry of investigations, legal actions, and penalties from
authorities and regulators across the globe, including the US, UK, Switzerland, Japan, and the
EU. Besides that, As the banks had to adjust to the shifting market conditions and regulatory
landscape, they also confronted strategic uncertainties and obstacles (Micklethwait, Dimond,
Micklethwait, & Dimond, 2017). To resolve the accusations, a number of institutions,
including Barclays, UBS, and RBS, consented to pay hundreds of millions or even billions of
dollars in penalties. It sparked demands for changes to LIBOR and other benchmark rates,
including increased control, transparency, and verification (O'Brien & Dixon, 2012).
According to Wheatley Review in 2012. It recommended several changes to the Libor,
including fewer currencies and maturities, a delay in publishing banks' submissions, and a
search for a new administrator (Strotkamp, 2018). As rating agencies decreased or reviewed
the banks' credit ratings, the banks also faced increased borrowing costs and competitive
disadvantages. To strengthen their financial condition, a few banks were forced to sell assets
or raise more capital (Micklethwait & Dimond, 2017).
4b)

One of the measures that have been implemented to reduce the possibility of similar
misbehaviour in the future is implementing substitute reference rates that are less
manipulable, transaction-based, and more observable. In anticipation of the demise of
LIBOR, the World Bank has approved new reference rates for both new and existing loans.
For example, Secured Overnight Financing Rate (SOFR), Sterling Overnight Index Average
(SONIA) and Tokyo Overnight Average Rate (TONA) (Huan, Previts, & Parbonetti, 2022).
As I mentioned above in 2b, SOFR is a secured rate, which is calculated as a volume-
weighted median of transaction-level tri-party repo data and is less manipulable than LIBOR
(Taylor-Brill, 2020). In the sterling money market, the average interest rate paid on unsecured
overnight transactions is measured by the SONIA. It is computed using the transactions that
members of the Wholesale Markets Brokers' Association (WMBA) have facilitated. It serves
as both an overnight index swap reference rate and a benchmark for short-term interest rates
(Jackson, & Sim, 2013). TONA is a benchmark rate to replace the Japanese yen LIBOR
interest rates. It is the average interest rate in Japanese Yen (JPY) that a range of financial
institutions lend to one another over the course of a night. Since December 28, 2016, the
Bank of Japan has recommended this rate as the preferable Japanese yen risk-free reference
rate (Ooka, Nagano, & Baba, 2006).

Another measure that has been implemented to reduce the possibility of similar misbehaviour
in the future is Regulators should have greater access to and authority to monitor and
intervene in the operations and activities of banks, particularly those engaged in intricate and
risky transactions like derivatives and benchmarks, in order to implement more intrusive and
detailed supervision with an emphasis on structural reforms in the banking industry. Aiming
to address the underlying causes of misbehaviour and market failures, such as conflicts of
interest, a lack of transparency, poor governance, and a lack of strong ethical standards, is
another goal for regulators. They can implement ring-fencing which is the division of a
bank's investment banking operations from its retail banking operations. The goal is to shield
customer deposits and payments from the dangers and losses associated with speculative
operations. For instance, the Vickers reforms in the UK mandate that banks ring-fence their
core services by 2023 (Huan et al., 2022).

I think regulators and the industry have not fully resolved this issue. Since there may be
trade-offs between the transparency and liquidity of the underlying markets and the
robustness and representativeness of the alternative rates, the benchmark reforms may not
completely eliminate the danger of manipulation or misreporting. Due to information
asymmetry, resource limitations, cognitive capture, or political pressure from large banks, the
regulatory bodies may not be able to stop or identify future wrongdoing in the banking sector.
Besides that, The LIBOR changeover can have complicated and expensive valuation and
accounting impacts since it necessitates adjusting the fair value and hedge accounting of
financial instruments that use LIBOR (Huan et al, 2022).
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