LIBOR Scandal

LIBOR Scandal

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  LIBOR Fixing Scam “ This dwarfs by orders of magnitude any financial scam in the history of markets. “ Assignment – 1 Banking & Financial Institutions and Markets SPJIMR Durgesh Singh Anant Damle Group Karan Miglani Vipin Mohan Ankita Biyani Angshuman Adhikari Sreekanth Daruvuri 2
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  Agenda What isLIBOR? Current LIBOR Process Spread & Impact of manipulation New Regulations
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  The LIBOR isthe average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks Pre-conditions 28 Yrs 64 Contributions must represent rates Established in Nations formed in London and not elsewhere 1984 by BBA represented LIBOR Highlights Rate submitted should be formed from that bank’s perception of its 223 5 cost of funds in the interbank market Must be for the currency concerned, Total Types of not by borrowing in other currency Members stakeholders via FX markets Rates must be submitted by staff at a 10 15 bank responsible for bank’s cash management Quoted Quoted Fund is an unsecured interbank cash Currencies Maturities or cash raised through issuance of CD A virtual borrowing rate for select banks which forms the benchmark for borrowings LIBOR in rest of the world for various financial products in underlying and derivatives
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  The most widelyused reference rate in the world is LIBOR, basis for international borrowings Rates fixed to Products using LIBOR USD–LIBOR Currencies Quoted Australian Canadian Standard Interbank Commercial Field Hybrid MIBOR dollar (AUD) dollar (CAD) Swiss franc Danish krone (CHF) (DKK) SIBOR Euro British pound Global exposure to LIBOR (EUR) sterling (GBP) HIBOR 45 % $350 tn Japanese yen (JPY) New Zealand dollar (NZD) Mortgage indexation Derivative underpins of US to LIBOR to LIBOR KIBOR Swedish krona (SEK) U.S. dollar (USD) 3-major classifications of interest rate fixings instruments which often use the Libor SCOPE as reference rate
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  Individual LIBOR ratesare calculated based on submissions from contributor banks averaged under a "trimmed mean" methodology 11 AM 12 PM REST OF DAY TR calculates rate. An INDIVIDUAL at the Data distributed Apply Governance & bank determines day’s simultaneously to TR Data stored Scrutiny Protocols. LIBOR submissions networks, users and in TR Compiles stats for distributors historical DB FX & MMC Contributor Bank Thomson Reuters Thomson Reuters Monitors quality of data inputs into LIBOR Monitor data and and performance of TR improve governance and informs Board and and scrutiny regime, FX&MMC of market design & operation LIBOR Ltd. FX & MM Committee At what rate could you borrow funds, were you to do so by asking for and then Process accepting inter-bank offers in a reasonable market size just prior to 11 am?
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  The scandal arosewhen banks falsely inflated or deflated their rates to profit from trades, or to project false creditworthiness Pls go for 5.36 LIBOR again, very important that the setting comes as high as possible ... thanks. Hi Guys, We got a big position in 3m LIBOR for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Thanks a lot. It’s just amazing how Libor fixing can make you that much money or lose if opposite. It’s a cartel now in London. SCANDAL The first reports of unsound foundations were published by WSJ in 2008
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  Regulatory lapses andfalse confidence in free markets has resulted in turn of events of catastrophic magnitude 27/6 6/7 28/9 Admits to Start Criminal BBA removed, 2012 LIBOR Investigation Replaced with misconduct of LIBOR fixing data providers Barclays SFO FSA Primary Causes 2008 Conflict of Lack of 11/4 16/4 Interest Oversight Investigation on Study casts Barclays for doubt on Key Lack of under-reporting Rate External NY Fed WSJ Accountability Speculatory and disgraceful behaviour in determination of an international key rate SCANDAL has resulted large-scale process re-engineering
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  Effect of LIBORcorrection will result increased risk for all market participants and greatly diminished short term returns Statistical analysis indicated that the Libor Mortgage rates on reset date rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset" The manipulation of Libor caused Derivative payments on interest rate swaps to be Returns smaller than they should have been, resulting in high losses to derivative market participants The inaccuracy of LIBOR to capture macro-economic risk has resulted in wide-spread EFFECT risk leakage into the system
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  Regulations are beingput in place to improve LIBOR determination and related processes throughout the WORLD • The merits of alternative Immediate Action • Regulatory compulsion reference rates for to participate Long Term certain applications and • Remove sparsely used the roles should be Wheatley Report currencies and tenors analysed and if merited • Regular publication of should be transitioned to statistical bulletin Institutional Reforms • New organisation for • FSA as interim controller • Establish strict process Governance LIBOR computation • Operate under for submission Governance Council verification through market data • External Audit of submitting firms REGULATION Strong Regulation is the need of hour
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  THANK YOU