Libor overhaul in bid to stop manipulation by bad banker and brokers

Tim Wallace
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Libor is now being run by NYSE’s Ice Benchmark Administration unit (Source: Getty)
Key interest rate Libor will be based on huge numbers of transactions in future, as part of its new administrator’s plan to stop bad bankers and brokers trying to fiddle the rate.

It is now being run by Intercontinental Exchange's Benchmark Administration (IBA) unit, which has come up with a wide-ranging plan in an effort to restore the integrity of the benchmark.

Previously banks were asked to submit a number showing how much they would expect to pay to borrow money from another bank, at just before 11am each day.

In future, the plan is for banks to submit data on all the loans in the previous 24 hour period, which will be weighted by size and averaged out to create an accurate figure.

The longer window should deny any market participants the chance to shuffle transactions around to alter the rate at that moment.

And the system will use transactions including big firms and central banks, rather than purely bank-to-bank loans, the proposals said. This is designed to remove human judgement from the system, preventing abuse.

When the credit crunch struck and banks had no data to use, the Libor submitters had to guess a number – again opening the system to manipulation.

Under the new plans they will estimate it from existing market data – potentially including debts trading in the secondary market – in a bid to make the system fairer.

And if there is still no data to go on, submitters’ estimates will be run part a series of analysts who will judge the quality of the figure before using it to set Libor.

The IBA is seeking feedback from market participants and rate-users, and is taking comments on the proposals until 19 December.

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