Before a rate-rigging scandal rocked the City, the London interbank offered rate (Libor) was one of the most important but least known cogs in the wheels of global markets.
Envisaged as a so-called risk-free rate, a panel of major banks formerly under the auspices of the British Bankers’ Association (BBA) reported the cost of borrowing in US dollars, sterling, euro, Japanese yen and Swiss franc over time periods from a day to a year.
The problems arose out of the way it was reported: a lack of transactions (only 15 in the whole of 2016 for one of the 35 combinations) meant it often relied on judgement alone, opening the door to illegal manipulation.
InterContinental Exchange (ICE) will continue to run Libor, after focusing the benchmark more on real data. Libor could still have a future as a measure of bank credit risk, suggests Darren Ruane, head of fixed interest at Investec.
“The problem with Libor is it has tried to be two things: the risk-free rate and a measure of bank credit risk,” he said. That issue may now be gone if Libor is more focused on the latter.
But for a risk-free rate, regulators are looking for replacements. The US Federal Reserve will use a Treasury repo rate, based on borrowing backed by government bonds, while the European Central Bank has explored using a weighted average of all overnight unsecured interbank lending backed up by a formula for low liquidity.
With Swiss and Japanese authorities also undergoing similar processes, there is the prospect of fragmentation hanging over the market.
Ruane said: “It’s not clear to me: are we going to come up with different rules for different jurisdictions?”
London interbank offered rate, better known as Libor, is established by the British Bankers’ Association (BBA), now part of UK Finance
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