In some ways this was an accident waiting to happen.
It seems
to me there was an inherent flaw in the way LIBOR and FX rates were fixed.
LIBOR was
set by the British Bankers Association (BBA) asking a group of banks the rate
at which they would lend to each other. – London Inter- Bank Offered Rate
- for the particular currency that the quote was asked for.
LIBOR, the
London Inter-Bank Offered Rate, is, I understand, calculated by taking the
average of the rates that each member a panel of banks says it could borrow
funds at, were it to do so by asking for and then accepting inter-bank offers
in reasonable market size, just prior to 11.00 London time. The top four and
the bottom four are discarded and then the average of the others is set as
LIBOR. The process was handled by British Bankers Association (BBA).
It is
important to note that no Bank actually has to deal at the rate they
submitted.
The
members of the panel of banks are drawn from the world’s leading banks.
The
interest rates are fixed for the world’s leading currencies for periods from
one month to one year.
The FX
rate fixing has similarities to the above process. WM Reuters publishes
rates from buy-and-sell quotations from a group of “reference banks”.
Whilst the banks probably will buy and sell at the quoted rates, front running
or manipulating transactions can take place. FX rates are ‘fixed’ by taking the
rates published in the Reuters display.
No
institution has to have dealt at the quoted FX rate.
By
contrast for exchange traded securities (stocks and bonds) and derivatives
(futures and options) the daily closing prices are fixed on the basis of actual
trades.
If there
is an attempt to manipulate securities or derivatives prices, the price feed
will track and display the change in price. Market monitoring staff and / or
regulatory transaction monitoring staff will identify suspicious price
movements / manipulating transactions and the trade reporting systems will enable
identification of the traders who can be investigated. Front running and other
manipulating transactions and devices can be traced back to individual traders
as all trades are recorded.
Neither LIBOR
nor FX rates are fixed on the basis of actual transactions.
In
Shakespeare’s play ‘Julius Caesar’ Cassius said to Brutus “The fault, dear
Brutus, is not in our stars, but in ourselves.” In similar vein in could be
said of LIBOR and FX Rate fixings that the fault lies more with the nature of
the benchmark rather than the people manipulating it.
Perhaps
the systems for setting LIBOR and FX rates need to change?
