LIBOR Manipulation and Municipal Derivatives


On July 6th, the Serious Fraud Office of the United Kingdom announced an investigation into alleged manipulation of the London interbank offered rate (“LIBOR”), which is the benchmark rate referenced in hundreds of trillions of U.S. dollars of securities, loans and transactions, including interest rate derivatives having some US$350 trillion in outstanding notional amount.

In June, U.S. and U.K. regulators agreed to a US$450 million settlement with Barclays plc in connection with allegations relating to the manipulation of LIBOR.  Since the announcement of that settlement, dozens of civil lawsuits have been filed against dealers.  Many of those filing suit are municipal issuers that receive LIBOR-based payments under interest rate swaps with dealers, typically related to their variable rate debt obligations.  These issuers argue that suppression of the LIBOR rate has led to artificially low amounts being calculated on the floating rate legs of their swaps, resulting in losses.

On July 30th, Her Majesty’s Treasury announced the scope of an independent review of the benchmark rate by Martin Wheatley, the chief executive-designate of the Financial Conduct Authority.  Among other things, a report will be produced that proposes policy recommendations to reform the current framework for setting and governing LIBOR by investigating: (i) whether participation in the setting of the rate should be a regulated activity; (ii) the construction of LIBOR, including the feasibility of using actual trade data (as opposed to estimates) to set the rate; (iii) the potential for alternative rate-setting processes; and (iv) the financial stability consequences of moving to a new regime, and how such a transition could be accomplished.  The review is also intended to address the adequacy and scope of sanctions for confronting LIBOR abuse, including the scope of U.K. authorities’ civil and criminal sanctioning powers with respect to financial misconduct. An initial discussion paper based on the Wheatley review was published on August 10th, which began a four-week public consultation period.  The discussion paper sought views on various reform options, but suggested that the LIBOR rate would have to undergo fundamental change, stating: “[r]etaining LIBOR unchanged in its current state is not a viable option, given the scale of identified weaknesses and the loss of credibility that it has suffered.”[1]  A final report containing conclusions and recommendations is expected to be published shortly.

[1] This initial discussion paper may be found at