LIBOR Market Manipulation

Why did banks manipulate LIBOR?

Heavy scrutiny of LIBOR revealed that submitters at the major banks colluded to manipulate rates to suit their positions to generate huge profits. On days when banks had large amounts of floating-rate loans re-fixing, traders would try to get others to submit high quotes to drive up LIBOR and raise loan rates. If large swap positions where banks were paying a floating rate were rolling over, traders tried to manipulate LIBOR lower. The scale of collusion was serious enough that even discarding high/low rates could not ensure a fair setting. Regulators were quick to reform LIBOR.

Outline the initial reforms in the UK and Europe

Wheatley Review reforms (UK):

1. Benchmark manipulation became a criminal offence
2. A new administrator – the InterContinental Exchange was appointed
3. LIBOR settings were cut back to just five currencies, in seven tenors down from 10 currencies in 15 tenors, eliminating meaningless LIBOR settings in highly illiquid markets

Euribor reforms:

1. A new Code of Obligations for panel banks
2. A new administrator
3. Clearer definitions
4. Fewer tenors