Libor Essay

1763 words - 8 pages

LIBOR & LIBORGATE

Recently there was a news that Barclays would pay $453 million to U.S. and British authorities to settle allegations that it had manipulated LIBOR , a benchmark interest rate that affects some $350 trillion worth of financial transactions. The scandal has since spread to implicate major banks and government regulators around the world, and could be one of the most expensive to hit the financial industry since the 2008 financial crisis.

Now the questions which arises in our mind are What is LIBOR exactly?, How it is calculated?, How did Barclays manipulate LIBOR etc.

LIBOR IN BRIEF

LIBOR is an acronym for the London Interbank Offered Rate, a benchmark ...view middle of the document...

m. (London time) the panel banks inform Thomson Reuters for each maturity at what interest rate they would expect to be able to raise a substantial loan in the interbank money market at that moment. The reason that the measurement is not based on actual transactions is because not every bank borrows substantial amounts for each maturity every day. Once Thomson Reuters has collected the rates from all panel banks, the highest and lowest 25% of value are eliminated. An average is calculated of the 50% remaining ‘mid values’ in order to produce the official LIBOR rate. Suppose there are 16 banks in the panel which submitted their estimated rate for each maturity to Thomson Reuters. Now out of this lowest four rates (lowest 25%) and highest four rates(highest 25%) would be eliminated. Average of remaining eight rates is calculated and published as the LIBOR for the day.

LIBOR CURRENCIES

At present LIBOR interest rates for ten currencies are calculated. This currencies are -:

American dollar - USD LIBOR
Australian dollar - AUD LIBOR
British Pound Sterling - GBP LIBOR
Canadian dollar - CAD LIBOR
Danish krone - DKK LIBOR
European euro - EUR LIBOR
Japanese yen - JPY LIBOR
New Zealand - NZD LIBOR
Swedish krona - SEK LIBOR
Swiss franc - CHF LIBOR

LIBOR MATURITIES

LIBOR rates are calculated for 15 different maturities. These are :-

One day
One week
Two weeks
One month
Two months
Three months
Four months
Five months
Six months
Seven months
Eight months
Nine months
Ten months
Eleven months
Twelve months

LIBOR MANUPULATIONS BY BARCLAYS

LIBOR works on a kind of honor code, so the manipulation part is fairly simple: Barclays reported a lower interest rate than it actually was paying. Barclays' alleged motive was to secure cheaper loans and to make itself appear healthier during the financial turmoil than it actually was.

The basis for a Contributor Panel bank’s submission, according to the BBA, must be the rate at which members of the bank’s staff primarily responsible for management of a bank’s cash, rather than a 2bank’s derivative trading book, consider that the bank can borrow unsecured inter banks funds in the London money market. Further according to the BBA, a Contributor Panel bank may not contribute a rate based on the pricing of any derivative financial instrument. In other words, a Contributor Panel bank’s LIBOR submissions should not be influenced by its motive to
maximize profit or minimize losses in derivative transactions tied to LIBOR. Barclays did the exact opposite.

Within Barclays LIBOR rate where manipulated through two different ways :-

Swaps Traders’ Requests Within Barclays
Interbank Swaps Trader Requests

Swaps Traders’ Requests Within Barclays

From approximately 2005 through 2007, and occasionally thereafter through approximately 2009, certain Barclays swaps traders requested that certain Barclays LIBOR submitters submit LIBOR contributions that would benefit the...

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