On October 20, ICE Benchmark Administration Limited (IBA) published a position paper on the evolution of the London Interbank Offered Rate (LIBOR) (also known as ICE LIBOR).
The paper sets out: IBA’s findings since it became the administrator of LIBOR in February 2014; proposed enhancements following the Financial Stability Board’s publication on Reforming Major Interest Rate Benchmarks; and an invitation for views on the proposals from all stakeholders in LIBOR. Position Paper.
On July 22, the International Organisation of Securities Commissions (IOSCO) published a Web page on its review of the implementation of IOSCO’s principles for financial benchmarks by administrators of the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR) and the Tokyo Interbank Offered Rate (TIBOR). IOSCO found that the three administrators have made significant progress in implementing most of the principles. However, further work is needed on implementing the principles on benchmark design, data sufficiency and transparency of benchmark determinations.
Also on July 22, the Financial Stability Board (FSB) published a report prepared by the Official Sector Steering Group (OSSG) of regulators and central banks on reforming major interest rate benchmarks. The report was based on the March 2014 report of the Market Participants Group, a group of private sector experts asked by the OSSG to identify additional benchmark rates and to analyze transition issues arising from a move to an alternative rate. It was also based on the IOSCO review.
In the report, the OSSG recommends a multiple-rate approach that involves: (i) strengthening the existing IBORs (the collective term used by the FSB for each of LIBOR, EURIBO and TIBOR) and other potential reference rates based on unsecured bank funding costs by underpinning them to the greatest extent possible with transactions data; and (ii) developing alternative, nearly interest-risk free reference rates. Web Page. FSB Report. Market Participants Group Report.
On February 3, The ICE Benchmark Administration (IBA) revised and published the London Interbank Offered Rate (LIBOR) code of conduct for contributing banks and a LIBOR whistleblowing procedure. These documents relate to IBA’s role as the administrator of LIBOR.
The LIBOR Code of Conduct sets out practice standards for contributing banks and covers a number of issues including governance arrangements, submission methodology, conflicts of interest, record-keeping and compliance. The UK Financial Conduct Authority (FCA) has confirmed that the Code is industry guidance.
The whistleblowing procedure explains how an individual can alert the IBA, on an anonymous basis, of any conduct that may involve manipulation, or attempted manipulation, of LIBOR. LIBOR Code of Conduct. Confirmed Industry Guidance. Whistleblowing Procedure.
On July 9, it was announced that NYSE Euronext Rate Administration Ltd, a new subsidiary of NYSE Euronext, will take over the administration of LIBOR from BBA LIBOR Ltd, a subsidiary of the British Bankers’ Association (BBA), subject to authorization from the Financial Conduct Authority and following a period of transition. BBA LIBOR Ltd is currently the interim administrator of LIBOR. NYSE Euronext Press Release.
As part of the continuing investigation by the UK’s Serious Fraud Office (SFO) into the manipulation of LIBOR, the City of London police charged former UBS and Citigroup trader Tom Hayes with eight counts of fraud on June 18. Mr. Hayes, one of three traders arrested last December in connection with the investigation, was also charged with fraud by US prosecutors in 2012 and threatened with extradition. The SFO related charges are the first to be made by a UK authority in relation to the LIBOR investigation. Press Release.
On June 12, the British Bankers’ Association (BBA) published a press release announcing changes to the London Interbank Offered Rate (LIBOR). The reforms follow the publication of the Wheatley Review in September 2012, and include:
- From July 1, the publication of BBA LIBOR individual panel banks’ daily submissions for USD, EUR, GBP, CHF and JPY will be embargoed for three months. The daily calculation and publication of BBA LIBOR fixing rates will continue unaffected. The rates for a whole month at a time will be published at the beginning of the fourth month; the first delayed release of individual bank submissions will be provided on the first business day of November 2013.
- The publication of “same day” EURO LIBOR rates for one week and one month will cease from July 31. These two rates were supplemental to the “spot” EUR LIBOR rates for all seven LIBOR tenors, which will continue as usual. Press Release.
On June 6, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published their final report setting out principles for benchmark-setting processes in the EU (ESMA/2013/659). The final report is divided into seven sections: General framework for benchmark setting; Principles for benchmark administrators; Principles for benchmark submitters; Principles for benchmark calculation agents; Principles for benchmark publishers; Principles for benchmark users and Principles for the continuity of benchmarks.
- The inter-bank lending rate, Libor, is one benchmark that will be affected by this report.
- Libor is the inter-bank offered rate currently set in London and is meant to reflect the average rate that banks pay to lend to each other.
The report follows the Libor scandal which emerged in June 2012 when UK and US authorities fined Barclays £290m for fixing the key inter-bank interest rate. Since then, Swiss bank UBS and Royal Bank of Scotland have been given fines of £940m and £390m, respectively. Final Report.
On March 5, The FSA published a report and management response concerning the manipulation of LIBOR. The report finds that the FSA was aware of disruption in the LIBOR market during the period between summer 2007 and early 2009, but such disruption may have been solely caused by volatile market conditions at the time. Nevertheless, the report concludes that the FSA should have considered whether manipulation of the benchmark interest rate was taking place.
The report recommends improvements in the sharing of intelligence between the soon to be established new financial regulatory authorities (FCA and PRA), to ensure that future indications of misbehavior in the LIBOR market are not ignored or missed.
An investigation by the Serious Fraud Office into the manipulation of LIBOR, which has so far resulted in the arrest of three men, is ongoing.
On February 21, the Treasury Select Committee published the FSA’s response in relation to its August 2012 report on LIBOR. The report had criticized the FSA for being behind the US regulator in formally investigating market rumors relating to the artificial rigging of LIBOR rates and made several recommendations for improvement in the future.
In its response, the FSA challenges accusations that it was too slow to investigate the manipulation of LIBOR rates, stating instead that it had worked closely with the Commodity Futures Trading Commission since 2008 to examine allegations of rate-rigging. The FSA noted that it has increased the intensity of its supervision since 2008, and will continue to do so following the separation into a “twin peaks” regulatory system. The FSA also disputes the view that it interpreted its powers to initiate criminal proceedings for fraud in relation to rate-fixing too narrowly, and instead reiterates its mandate to consult with the Serious Fraud Office (and other prosecutors where necessary) where there is evidence of offences which are beyond the scope of its own powers of investigation.
On February 6, the FSA issued a final notice to RBS imposing a fine of £87.5 million for misconduct in submitting rates for the calculation of LIBOR. RBS’ misconduct included the manipulation of submissions and several failings in respect of risk management systems and controls (including ongoing failings to identify inappropriate LIBOR submissions), as well as RBS’ collusion with other LIBOR panel banks and brokers in setting rates.
The FSA stated that the significant financial penalty of £87.5 million is intended to reflect both the widespread nature of the misconduct, as well as the harm caused to market participants and the integrity of the UK financial system. In related actions, RBS has agreed to pay $324 million to the US Commodities and Futures Commission and $150 million to the US Department of Justice.