The London Inter-bank Offered Rate is the average interest rate estimated by each of the leading banks in London that will be charged for borrowing from other banks. Usually abbreviated to Libor ( ) or LIBOR , or more formally for ICE LIBOR (for Intercontinental Exchange Libor) ). It was formerly known as BBA Libor (for the British Banker Association Libor or the libor ) before the responsibility for administration was transferred to the Intercontinental Exchange. This is the main benchmark, along with Euribor, for short-term interest rates worldwide.
Libor rates are calculated for five currencies and seven loan periods ranging from overnight to one year and published every business day by Thomson Reuters. Many financial institutions, mortgage lenders, and credit card agents set their own tariffs relative to them. At least $ 350 trillion in derivatives and other financial products related to Libor.
As of June 2012, several criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks linked to a rate shipment, leading to the Libor scandal. The British Bankers' Association said on September 25, 2012 that it would divert Libor's oversight to British regulators, as proposed by the independent recommendation recommendation of Management Director Martin Wheatley. Wheatley's review recommends that banks submitting interest rates to Libors should base it on actual interbank deposit-market transactions and keep records of such transactions, that Libor shipments of individual banks are issued after three months, and recommend special criminal sanctions for the manipulation of the benchmark interest rate. Customers of financial institutions may experience higher borrowing and hedging costs and are more volatile after the implementation of recommended reforms. The British government agrees to accept all the Wheatley Review recommendations and press for the rules that implement them.
Significant reforms, in line with the Wheatley Review, came into effect in 2013 and new administrators took over in early 2014. The British Government regulates Libor through criminal laws and regulations passed by Parliament. In particular, the 2012 Financial Services Act brings Libor under the supervision of British regulations and creates a criminal offense for deliberately or intentionally making false or misleading statements related to benchmarking.
Video Libor
Introduction
In 1984 it became clear that more and more banks were actively trading in relatively new market instruments, especially interest rate swaps, foreign currency options and advanced agreements. While acknowledging that the instrument is bringing more and more business into the London Inter-bank market, bankers worry that future growth could be inhibited unless uniformity measures are introduced. In October 1984, the British Bankers' Association (BBA) - working with other parties, such as the Bank of England - established various working parties, which eventually culminated in the production of BBA standards for interest rate swaps, or "BBAIRS" terms. Part of this standard includes the determination of BBA rates, the predecessor of BBA Libor. From 2 September 1985, the term BBAIRS became a standardized market practice. BBA Libor fixings did not start officially before 1 January 1986. Prior to that date, several levels were set for probation which began in December 1984.
Member banks are international, with more than sixty countries represented among 223 members and 37 related professional companies in 2008. Seventeen banks for example currently contribute to the establishment of Libor US Dollars. The panel contains the following member banks:
- Bank of America
- Bank of Tokyo-Mitsubishi UFJ
- Barclays Bank
- Citibank NA
- Credit Agricole CIB
- Credit Suisse
- Deutsche Bank
- HSBC
- JP Morgan Chase
- Lloyds Banking Group
- Rabobank
- Royal Bank of Canada
- SociÃÆ'Â © tÃÆ' Â © GÃÆ' Â © nÃÆ' Â © rale
- Sumitomo Mitsui Banking Corporation Europe Ltd.
- Norinchukin Bank
- Royal Bank of Scotland
- UBS AG
Maps Libor
Coverage
Libor is widely used as a reference level for many financial instruments both in the financial markets and commercial fields. There are three main classifications of interest rate instruments, including standard interbank products, commercial field products, and hybrid products that often use Libor as their reference level.
Standard interbank products :
- Advanced rate agreement
- The future of interest rates, e.g. Eurodollar futures
- Swap interest
- Swaptions
- Overnight indexed swaps, e.g. Libor-OIS spreads
- Interest rate options, Interest rate and floor limits
Commercial product fields :
- Floating level note
- Floating level deposit certificates
- Syndicated loan
- Variable rate mortgages
- Term loan
Hybrid products :
- Range of accrual records
- Upgrade callable records
- Goal goal record
- Hybrid perpetual notes
- Collateralized mortgage liability
- Secured debt obligations
In the United States in 2008, about sixty percent of prime mortgage rates were adjusted and almost all subprime mortgages were indexed to Libor US dollars. In 2012, about 45 percent of mortgage rates are adjusted to high rates and more than 80 percent of subprime mortgages are indexed to Libor. The municipal government also borrowed about 75 percent of their money through Libor-related financial products. In the UK, British Pound three months Libor is used for some mortgages - especially for those who have a bad credit history. The Libor Swiss franc is also used by the Swiss National Bank as their reference to monetary policy.
The usual reference level for the products of the euro currency rates, however, is the Euribor compiled by the European Banking Federation from larger bank panels. Euro Libor does exist, but mainly, for the purpose of continuity in swap contracts originating from pre-EMU periods. The Libor is an estimate and is not intended in a firm's binding contract. However, it is specifically mentioned as the reference level in the International Swaps and Derivatives Association documentation standards, used by parties wishing to transact on over-the-counter interest rate derivatives.
Definitions
Libor is defined as:
The rate at which the individual Panel Contributor bank can borrow funds, whether it is done by requesting and then accepting an inter-bank bid in fair market size, just before 11:00 London time.
This definition is reinforced as follows:
- The level requested by each bank must be established from the bank's perception of the cost of funds on the interbank market.
- Contributions should indicate the rate established in London and not elsewhere.
- Contributions must be for the currency in question, not the cost of producing one currency by borrowing in another currency and accessing the necessary currency through the foreign exchange market.
- Rates must be submitted by staff members at the bank with primary responsibility for the management of bank cash, not bank derivative books.
- What is meant by "funds" is: unsecured interbank cash or cash obtained through the issuance of Interbank Deposit Certificates.
The British Bankers' Association publishes basic guidelines for BBA Libor which contains much detail on its history and current calculations.
Technical features
Calculation
Libor is calculated by Intercontinental Exchange (ICE) and published by Thomson Reuters. This is an index that measures the cost of funds for large global banks operating in London financial markets or with London-based counterparty. Every day, BBA bank panel survey (18 major global banks for Libor USD), asks the question, "At what level you can borrow funds, did you do so by requesting and then receiving interbank offerings at fair market size just before 11 am? "The BBA throws 4 of the highest and 4th lowest responses, and the remaining averages are 10th middle, yielding 22% trimmed on average. The average is reported at 11:30 am.
Libor is actually a set of indices. There is a separate Libor rate reported for seven different maturities (length of time to repay debt) for each of 5 currencies. The shortest maturity is overnight, the longest being a year. In the United States, many private contracts refer Libor to the three-month dollar, which is an index generated by asking what tariff panels they would pay to borrow dollars for three months.
Currency
In 1986, Libor originally set interest rates for three currencies. These are the US dollar, British pound, and Deutsche Mark. Over time it developed into sixteen currencies. After a number of these currencies in 2000 merged into the euro, there remain ten currencies. After the reform of 2013, Libor rates are calculated for 5 currencies.
Aktif
- Dolar AS (USD)
- Euro (EUR)
- Poundsterling Inggris (GBP)
- Yen Jepang (JPY)
- Swiss franc (CHF)
Off
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- New Zealand Dollar (NZD)
- Danish krone (DKK)
- Swedish Krona (SEK)
Note that Euro LIBOR should not be confused with EURIBOR.
Maturities
Until 1998, the shortest duration was one month, after which a weekly rate was added. In 2001, rates for one day and two weeks were introduced. After the reform of 2013, Libor rates are calculated for 7 maturities.
Aktif
- 1 hari
- 1 minggu
- 1 bulan
- 2 bulan
- 3 bulan
- 6 bulan
- 12 bulan
Off
- 2 weeks
- 4 months
- 5 months
- 7 months
- 8 months
- 9 months
- 10 months
- 11 months
Fixed rate in USD
There are four money markets in the world that have interest rates offered between banks in USD, including:
- Libor fixed in London
- Mibor , or MIBOR (Interbank Bank Interbank Rate) set in India
- Sibor , or SIBOR (Singapore Bank Interbank Rate) is set in Singapore
- Hibor , or HIBOR (Hong Kong Offered Bank Tariff) set in Hong Kong
The Libor USD in London is the best known and dominant. Sibor USD was established in January 1988, and USD Hibor was launched in December 2006. Although this improvement in USD uses the same methodology by setting at 11:00 local time, the results of three different improvements.
Derivative based libor
Eurodollar Contract
The Eurodollar Chicago Mercantile Exchange contract is based on a three-month US Libor rate. They are the most traded short-term interest rate contracts in the world and extend for up to ten years. Shorter maturity is traded on the Singapore Stock Exchange in Asian time.
Swap rate
Interest rate swaps based on short Libor rates are currently traded on the interbank market for a period of up to 50 years. In the swap market, the "five-year Libor" rate refers to a 5-year swap rate in which floating legs refer to a 3- or 6-month Libor swap (this can be more accurately defined as "5-year rates vs. Libor 6 months"). "Libor base points", when talking about bonds, means that the bond cash flows should be discounted on the swap-zero coupon curves shifted by x base points to match the actual market price of the bonds. The day counting convention for the Libor interest rate in the interest rate swap is Actual/360, except for the actual GBP/365 (fixed) currency.
Reliability and scandal
On Thursday, May 29, 2008, The Wall Street Journal (WSJ) released a controversial study showing that banks may have downplayed the cost of loans they reported to Libor during the 2008 credit crisis. Lack of reporting it can create the impression that banks can borrow from other banks less costly than they can realize. It could also make the banking system or certain contributing banks appear healthier than during the 2008 credit crunch. For example, the study found that interest rates at which a large bank (Citigroup) "said it could borrow dollars for three months around 0.87 percentage points lower than the rate calculated using the default insurance data. "
In September 2008, former members of the Bank of England Monetary Policy Committee, Willem Buiter, described Libor as "the rate at which banks do not lend to each other", and called for a replacement. The former Bank of England governor, Mervyn King, then used the same description before the Financial Election Committee.
To further take the case to light, The Wall Street Journal reported in March 2011 that the regulator focuses on Bank of America Corp., Citigroup Inc. and UBS AG. Making a case will be very difficult because it determines the level of Libor does not occur on an open exchange. According to a person familiar with the situation, a call from the court was issued to three banks.
In response to research released by the WSJ, the British Bankers Association announced that Libor continues to be reliable even in times of financial crisis. According to the British Bankers Association, other proxies for financial health, such as the default credit insurance market, are not always healthier than Libor in times of financial crisis, although they are mostly used in Latin America, especially Ecuador and Bolivia markets.
In addition, some other authorities contradict the Wall Street Journal article. In the March 2008 Quarterly Review, the Bank for International Settlements has stated that "available data do not support the hypothesis that the contributing banks manipulate their quotations to benefit from positions based on improvements." Furthermore, in October 2008, the International Monetary Fund issued a Review of Global Financial Stability ( Global Financial Stability) which also found that "Although the integrity of the US dollar Libor pricing process has been questioned by some market participants and the financial press. The US dollar lender remains an accurate measure of the bank's marginal fee worthy of credit from unsecured dollar-time funding. "
On July 27, 2012, the Financial Times published an article by a former trader stating that Libor's manipulation has been common since at least 1991. Further reports on this have come from the BBC and Reuters. On November 28, 2012, the Bundestag Finance Committee held a hearing to learn more about this issue.
In late September 2012, Barclays was fined £ 290m for his attempts to manipulate Libor, and other banks are under investigation for having acted similarly. Wheatley is now asking the British Bankers Association to lose its power to determine Libor and for OJK to impose criminal sanctions as well as other changes in the ten-point improvement plan.
The British Bankers Association said on September 25 that it would transfer LIBOR's oversight to British regulators, as proposed by the managing director of the Financial Services Authority Martin Wheatley and CEO-appointed from the new Financial Conduct Authority.
On September 28, a Wheatley independent review was published, recommending that independent organizations with government and regulatory representatives, called the Tender Committee, manage the LIBOR arrangement process under a new external oversight process for transparency and accountability. Banks applying to LIBOR will be required to base on actual interbank deposit market transactions and keep records of their transactions in favor of such shipments. The review also recommends that LIBOR shipments of individual banks be issued, but only after three months, to reduce the risk that they will be used as a creditworthiness measure of the filing bank. This review opens the possibility that the regulator may force additional banks to participate in the submission if an insufficient amount is voluntary. The review recommends specific criminal sanctions for the manipulation of benchmark interest rates such as LIBOR, saying that existing criminal regulations for the manipulation of financial instruments are inadequate. LIBOR interest rates may be higher and more volatile after the implementation of these reforms, so clients of financial institutions may experience higher borrowing costs and higher and more volatile hedges. The British government agrees to accept all the Wheatley Review recommendations and press for the rules that implement them.
CEO of Bloomberg LP Dan Doctoroff told the European Parliament that Bloomberg LP may develop an alternative index called Bloomberg Bloomberg Interest Rates which will use data from transactions such as market-based quotes for credit default swap transactions and corporate bonds.
Criminal investigation
On February 28, 2012, it was revealed that the US Department of Justice was conducting a criminal investigation into Libor abuse. Among the offenses investigated is the possibility that traders make direct communication with the bankers before the price is set, thus allowing them an advantage in predicting the day's improvements. Libor supports about $ 350 trillion in derivatives. One merchant message indicates that for every base point (0.01%) that Libor is moved, those involved can record "around several million dollars".
On June 27, 2012, Barclays Bank was fined $ 200 million by the Commodity Futures Trading Commission, $ 160 million by the US Department of Justice and Ã, Â £ 59.5 million by the Financial Services Authority for Libor and Euribor tribal manipulation efforts. The US Department of Justice and Barclays officially agree that "the manipulation of the filings affects the fixed rate on several occasions". On July 2, 2012, Marcus Agius, chairman of Barclays, resigned from the following position of interest rate cheating scandal. Bob Diamond, chief executive of Barclays, resigned on July 3, 2012. Marcus Agius will fill his post until his successor is found. Jerry del Missier, Barclays' chief operating officer, also resigned, as a victim of the scandal. Del Missier later admitted that he had instructed his subordinates to submit the forged LIBOR to the British Bankers Association.
Until July 4, 2012 the extent of the scandal was proven and a topic of analysis on news and financial programs that seek to explain the importance of the scandal. On July 6, it was announced that the British Serious Deception Office has also opened a criminal investigation into interest rate manipulation efforts.
On October 4, 2012, US Republican Senators Chuck Grassley and Mark Kirk announced that they were investigating Treasury Secretary Tim Geithner for engagement with a level manipulation scandal. They accuse Geithner of knowledge of tariff fixing, and the inaction that contributes to litigation that "threatens to clog our courts with multi-billion-dollar class action law" alleges that the extent of manipulation harms state, municipal and local governments. Senators say that the US-based interest rate index is a better alternative that they will take steps towards creation.
Aftermath
Preliminary estimates are that the manipulation scandals level the cost of US states, districts, and local governments at least $ 6 billion in fraudulent payment payments, above the $ 4 billion that state and local governments have had to spend to relax their position exposed to level manipulation.
Alternative to USD LIBOR
Alternative Reference Level Committee
In 2014, the US Federal Reserve Board and the Federal Reserve Bank of New York announced the creation of an Alternative Rate Reference Committee (ARRC) to assess viable alternatives to LIBOR.
In 2016 ARRC released its first report on a possible index that could serve as a substitute for LIBOR.
On March 7, 2018 ARRC announced that the committee had been rearranged and the following groups participated.
ARRC will consist of the following institutions:
- AXA
- Bank of America
- BlackRock
- Citigroup
- CME Group
- Deutsche Bank
- Federal National Mortgage Association
- Federal Home Loan Mortgage Corporation
- GE Capital
- Goldman Sachs
- The Association of Government Finance Officers
- HSBC
- Intercontinental Exchange
- International Swap and Derivatives Association
- JP Morgan Chase & amp; Co.
- LCH Clearnet
- MetLife
- Morgan Stanley
- National Association of Corporate Treasurers
- Pacific Investment Management Company
- TD Bank
- The Federal House Bank of New York
- Independent American Community Bankers
- Syndicated Loans and Trade Associations
- Securities Industry and Financial Markets Association
- Wells Fargo
- The World Bank Group
In addition, the following agencies will serve as ex officio members of the ARRC:
- Federal Reserve System Board of Governors
- Consumer Financial Protection Bureau
- Federal Deposit Insurance Corporation
- Federal Housing Finance Agency
- The Federal Reserve Bank of New York
- Financial Research Office
- The Office of Financial Currency Supervision
- US. Commodity Futures Trading Commission
- US. Securities and Exchange Commission
- US. Ministry of Finance
Lowest Overnight Financing Rate
In June 2017, the ARRC announced the extensive repayment rate of the Treasury repo, SOFR, as a recommended alternative to USD LIBOR. In his justification for this choice, the ARRC says:
SOFR is a full transaction-based level that will have the widest coverage of any available Treasury repo level and will be published daily by the Federal Reserve Bank of New York starting April 3, 2018. Due to its scope coverage, SOFR is a good representation of the general repo market Treasury overnight. Thus it will reflect the economic costs of loans and loans relevant to the diverse market participants active in these markets, including brokers, money market funds, asset managers, insurance companies, securities lenders, and pension funds.
Reform
The Libor Administration itself has become a regulated activity overseen by the UK's Financial Conduct Authority. Furthermore, deliberately or intentionally making false or misleading statements in relation to the determination of the benchmark is made a criminal offense under English law under the Financial Services Act of 2012.
Danish, Swedish, Canadian, Australian and New Zealand Libra levels have been discontinued.
From the end of July 2013, only five currencies and seven maturities will be quoted daily (35 tariffs), reduced from 150 different Libor rates - 15 due for each of the ten currencies, making it more likely that the proposed tariff is supported by real trade.
Since the beginning of July 2013, any individual submissions from banks are embargoed for three months to reduce the motivation to send fake tariffs to illustrate the credit worthiness.
The new code of ethics, introduced by the new temporary supervisory committee, is built on this by describing the system and controlling the companies that need to be around Libor. For example, every bank now must have a named person responsible for Libor, responsible for any errors. The banks should keep records so they can be audited by the regulator if necessary.
In early 2014, NYSE Euronext took over the Libor administration of the British Bankers Association. The new administrator is NYSE Euronext Rates Administration Limited, a London-registered company, registered in the United Kingdom, governed by the Financial Conduct Authority of the United Kingdom.
On November 13, 2013, the Intercontinental Exchange (ICE) Group announced the successful completion of the NYSE Euronext acquisition. As a result of this acquisition, NYSE Euronext Rate Administration Limited was renamed ICE Benchmark Administration Limited. The appointment of a new administrator is a major step forward in the LIBOR reform.
The scandal also led to the European Commission proposal of the EU-wide benchmark rule, which could affect Libor as well.
Future
On July 27, 2017 the Financial Behavior Authority, the UK's chief regulator, who oversees Libor, announces the benchmark will be removed by 2021.
See also
- Interbank lending market
- Euribor
- JIBAR
- LIBID
- Libor-OIS spreads
- SHIBOR
- SONIA
- Ted spreads
- TIBOR
- SIBOR
- HIBOR
Further reading
- Carrick Mollenkamp and Mark Whitehouse, "Study of Doubtful Doubt on Key Rate: WSJ Analysis Suggests Banks May Have Reported Des Flair Interest Data for Libor", The Wall Street Journal , Thursday, 29 May 2008, p. 1.
- Donald MacKenzie, "What's in Numbers?", London Review of Books , September 25, 2008, pp.Ã, 11-12.
- Matt Taibbi: Everything is Reduced: The Greatest Splitting Price Scandal Ever, Rolling Stone April 25, 2013
References
External links
- One year LIBOR rate at MoneyCafe.com with historical data and graphics
- Wheatley's review of LIBOR: Final Report
- Financial Times: article list
Source of the article : Wikipedia
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