09 Jul LIBOR Reset Rate
LIBOR Comes Home
It never made sense that the USD LIBOR Rate reset at 11 AM London Time (5:00 AM New York Time) when most USD banks aren’t funding themselves yet. Even in calm markets, this process created issues in cross-currency swaps.
The LIBOR Rate and The Credit Crisis
During 2007-2008, the time difference became particularly visible. There were other problems to focus on during the credit crisis. But these other manipulations put a magnifying glass on the IBOR Reset Rates.
The commonly held view is that the USD LIBOR Reset crisis resulted from the British Bankers Association Panel banks reporting USD LIBOR Reset Rates that were too low relative to where the LIBOR deposit rates were trading. The presumption was that this caused the Reset Rate to be out of line with other rates trading in the market. This misalignment brought to light the problems with USD LIBOR Resets Rate manipulation. Hopefully, having LIBOR reset during US Hours we can prevent any future problems.
The Asian and European markets experienced the same type of manipulation. Basis swaps (the swaps between two floating rates, i.e., pay 3-month EUR and receive 3-month JPY), Euribor & TIBOR were all rigged by various banks.
Please view video series on the LIBOR crisis, Drive-by Knowledge – The LIBOR Crisis.
LIBOR Rate Changes For Now
- ICE will administer the process of setting the LIBOR Reset Rates, and Thomson Reuters is responsible for data collection.
- LIBOR Rate observations will consist of actual transactions downloaded from the Swap Execution Facilities (SEF).
There will no doubt be more changes to come.