LIBOR Market Manipulation

Peter Eisenhardt

30 years: Capital markets & investment banking

Peter explains how some traders submitting LIBOR rates were colluding to manipulate rates to suit their positions and generate huge profits.

Notable Market Developments

Peter explains how some traders submitting LIBOR rates were colluding to manipulate rates to suit their positions and generate huge profits.

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LIBOR Market Manipulation

2 mins 34 secs

Key learning objectives:

Outline the initial reforms in the UK and Europe
Learn why banks manipulated LIBOR

Overview:

Scrutiny of LIBOR revealed that submitters at the major banks colluded to manipulate rates to suit their positions to generate huge profits. This lead to regulatory reforms in the form of the Wheatley Review reforms (in the UK) and the Euribor reforms (in Europe).

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Summary

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.

What initial reforms were introduced in the UK and Europe?

Wheatley Review reforms (UK):

Benchmark manipulation became a criminal offence
A new administrator – the InterContinental Exchange was appointed
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:

A new Code of Obligations for panel banks
A new administrator
Clearer definitions
Fewer tenors

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Peter Eisenhardt

Peter has over 30 years experience working in banking. He has held several senior positions in international investment banks. Peter is now the Secretary General of the International Council of Securities Associations

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