London Interbank Offer Research Articles

Enabling a holistic solution to London Interbank Offer Rate repapering

This paper examines the discontinuation of the interbank offered rates (IBOR) and explores how a holistic approach that utilises the right resources and processes for each step of preparing for the discontinuation can have a significant impact. At the end of 2021, IBOR is being discontinued (with the exception of certain US tenors that will discontinue in 2023), and with it will come a slew of changes in financial markets. Because of the discontinuation of IBOR and the necessary repapering process, there are a number of associated challenges that can arise, including matters related to compliance, data consistency and organisational alignment. This paper discusses the challenges associated with IBOR repapering as well as the issues that can and will arise from not being proactive in preparing for IBOR reform. Additionally, this paper discusses what goes into developing an effective workflow before it is enacted. Further, this paper takes a broader view on what the best practices look like for each step of the repapering process, including review, analysis, execution and engagement, as well as what an end-to-end repapering process will look like in 2021. As institutions prepare for the changes on the horizon, a smooth end-to-end repapering process is crucial as the financial markets brace for the discontinuation of IBOR, and it is important to look for ways to drive efficiencies, such as the utilisation of artificial intelligence (AI) technologies. For all parties impacted by the discontinuation of IBOR, this paper provides a detailed look on how to be prepared and what an efficient and effective preparation should look like from start to finish.

Capital Market Consequences of the Libor Scandal and Phaseout for Public Borrowers

The London Interbank Offer Rate (LIBOR), based on inputs from banks, is plausibly the most important set of reference interest rates in the world. Following the LIBOR rigging scandal and the post-2008 decline in interbank lending underpinning LIBOR, banks and regulators have agreed to sustain LIBOR only through the end of 2021, after which, LIBOR updates are likely to cease. In this paper, we use an event-based design to study the implications of the LIBOR scandal and phaseout (LSP) on capital markets, focusing on firms with U.S.-traded public debt. Using LSP events as exogenous shocks to the optimality of existing contracts, we provide causal evidence on the effects of the LSP on firms and their stakeholders. Our findings suggest that the consequences of the LSP, as measured by stock and bond returns, are immaterial for the average firm, but negative for firms with fewer outside options to renegotiate or repurchase debt (i.e., with credit ratings below investment grade or lower interest coverage ratios). These results suggest that the negative consequences of the LSP have mostly been borne by the shareholders and bondholders of borrowers with limited options to renegotiate or repurchase debt.

ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI UTANG LUAR NEGERI INDONESIA

Debt management as a part of the Fiscal Policy is a consequence of national budget deficit. Nowadays, total Indonesian foreign debt is growing very significantly. The aims of this study are to know the effect of variable Budget Deficit, Exchange Rate, London Inter Bank Offered Rates (LIBOR), Payment of Foreign Debt, and Previous Foreign Debt to Foreign Debt in Indonesia.The methodology in this study employs ordinary least squares (OLS), and time series data from 1986 to 2015. The result shows that (1) the Budget Deficit, Exchange Rate, and Previous Foreign Debt have significant effect, the London Inter Bank Offered Rate (LIBOR) and Payment of Foreign Debt have not significant effect on Foreign Debt in Indonesia.

FAKTOR-FAKTOR YANG MEMPENGARUHI NILAI TUKAR RUPIAH TERHADAP DOLAR AMERIKA DENGAN MODEL KOREKSI KESALAHAN ENGLE-GRANGER (PENDEKATAN MONETER)

Exchange rate measures the value of a certain foreign exchange from other foreign exchange's perspective. As the condition of economic changes, the exchange rate ma change substantially. The decrease of the value of a foreign exchange is called depreciation and the increase value of a foreign exchange is called appreciation.The equilibrium exchange rate will change along with the change of demand and supply. Factors causing the change of demand and supply curve among others are the amount of money supply, relative gross domestic product (GDP) and the level of relative interest rate.The research is aimed to analyze the influence of variables of Indonesian money supply, American money supply, Indonesian real Gross Domestic Product, American real Gross Domestic Product, deposits interest rate and LIBOR (London Interbank Offer Rates on SDR Deposit) both in short and long terms.One of the ways to analyze the influence of short term and long term is by developing the dynamic model. In this research, the analyzes of dynamic model was conducted with ENGEL-GRANGER ERROR CORRECTION MODEL approach which was developed by ENGEL-GRANGER (1987) based on GRANGER REPRESENTATION THEOREM.The ECM analyzes was chosen not only because of its ability to solve the problem of time series which is not stationer, and spurious regression and spurious correlation in the economic analyses but also its ability to discuss the consistence of empiric model with economic theory. Beside, ECM concept is also thought to be more realistic in observing the development of economics variables from the result of the analyzes during the time of observation. It was known that long-term exchange rate is influenced by Indonesia real Gross Domestic Product and the number of Indonesian money supply. The variable of Indonesian real Gross Domestic showed the significant result and the signal test was convenient with the theory. The variable which influence" short term exchange rate are the amount of Indonesian money supply, Indonesian real Gross Domestic Product, and Indonesian deposit interest rate. The three variables showed the significant result and the signal test was convenient with the theory.

ANALISIS PERMINTAAN DEPOSITO DALAM VALUTA ASING PADA BANK SWASTA NASIONAL DI INDONESIA

High demand for foreign currency deposit is the background of this research with purpose to analyze influence Gross Domestic Product (GDP) per capita, Rupiah deposit interest rate, exchange rate Rupiah to America Dollar, and London Interbank Offer Rate (LIBOR) international interest rate for deposit demand in foreign currency in National Private Bank in Indonesia. To analyze that influence quadratic linear regression analysis used with Partial Adjustment Methods (PAM). From classic assumption test, there's no multicollinearity, heteroscedasticity, and autocorrelation. From statistical test resulted (test-t) that foreign currency savings from previous period, Rupiah deposit interest rate and LIBOR international interest rate have effect to deposit demand in foreign currency, with different validity rate such as: a = 1%, a ~ 5% and a = 10%, meanwhile GDP per capita and exchange rate have no affect to deposit demand in foreign currency. F-Test result that with validity level 99%, independent variables concurrently have effect to dependent variable. R2 result shows that 98% variance foreign currency deposit effect can be explained by variance in model, the other 2% explained by other variable excluded from applied model. However, long term adjustment value (d) amount

Linear Interpolation of Interbank Offered Rates - A Case Study of LIBOR & NIBOR

Interbank offered rates are benchmark interest rates at which a selection of banks can borrow and lend to one another in a given currency on a short-term basis. However, these rates are only available for certain tenors thereby creating the need to interpolate rates for tenors without directly observable rates. The aim of this paper is to discuss a practical method for linearly interpolating interbank offered rates with a special focus on the London Interbank Offered Rates (LIBOR) and the Nigerian Interbank Offered Rates (NIBOR).

Is LIBOR Still Being Manipulated?: Identifying Colluders with Methods of Detecting LIBOR Tampering

We analyze the one-month U.S. Dollar London Interbank Offer Rate (LIBOR) between January 1987 and February 2015 to determine whether there are signs of manipulation based on a previously published test that has appeared in a peer reviewed economics journal and been cited in the business press and legal filings of major financial disputes. Our analysis starts with the period from February 1, 2014 to February 28, 2015, after the Intercontinental Exchange (ICE) took over the publication of LIBOR from the British Bankers’ Association (BBA) and after significant time for reforms to be implemented related to the widely publicized LIBOR fixing messages between bankers, as detailed to the British government in the Wheatley Report. We find that this previously published test still indicates the presence of LIBOR manipulation from February 2014 and into 2015. We then perform the previously published test for tracking the integrity of important market indicators, such as LIBOR, from 1987 through February 2015, and find that this test would nearly always trigger a finding of suspicious behavior, either indicating that LIBOR has been consistently manipulated since 1987 to 2015 or that the proposed test has no power to distinguish periods of LIBOR manipulation from periods of non-manipulation. We further discuss the nature of scientific evidence and how the use of non-scientific methods, if taken seriously, can lead to the misallocation of corporate, regulatory, enforcement, and potentially, in the case of such a widely use financial measure as LIBOR, global economic resources.

Amicus Curiae Brief in Gelboim v. Bank of America (Libor Manipulation Litigation) on Behalf of Financial Markets Law Professors in Support of Plaintiffs-Appellants

This amicus brief, filed with the Second Circuit Court of Appeals in Gelboim v. Bank of America (LIBOR Manipulation Litigation), primarily aims to help the Court by providing relevant background information. Many of the plaintiffs in this case are bringing antitrust claims based on defendant banks' alleged collusion while selling plaintiffs over-the-counter derivatives. To evaluate these plaintiffs’ allegations, one must understand the nature of these derivative transactions, the economics of the over-the-counter derivatives market, and the specific role that the London Interbank Offer Rate (“LIBOR”) plays in that market. This brief provides that information. With this background in place, it becomes clear that these plaintiffs have properly alleged an antitrust injury. Plaintiffs allege that defendants, who controlled the over-the-counter derivatives market, conspired to manipulate LIBOR in order to increase their profits in the over-the-counter derivatives market. Plaintiffs allege that they, in their capacity as defendants’ customers in the over-the-counter derivatives market, suffered an injury as a result of defendants’ collusive LIBOR-setting behavior. Taking plaintiffs’ allegations as true, this is a classic antitrust injury.Accordingly, this court should reverse the district court’s opinion and remand for further proceedings.

Long-Run Determinants of Equity Foreign Portfolio Investment (EFPI) in Sri Lanka: A Time Series Analysis with Autoregressive Distributive Lag (ARDL) Approach

Equity Foreign Portfolio Investment (EFPI) is useful in enhancing the efficiency and liquidity of capital markets. This study explores the long-run determinants of EFPI in Sri Lanka using the autoregressive distributed lagged (ARDL) model. The dataset covers monthly time series data from 2004 to 2013. The findings suggest that the London Inter-Bank Offered Rates (LIBOR), foreign reserves presented in months of imports, USD/LKR exchange rate and domestic share market performance measured by the All Share Price Index (ASPI) are statistically significant and have a long-run positive effect on EFPI. The remaining variables, three-month Treasury bill rates, the Colombo Consumer Price Index (CCPI) and the S&P500 index are statistically insignificant. It is further revealed that there is a short-run causality running from months of imports, three month Treasury bill rates, USD/LKR exchange rates and CCPI towards EFPI at the Colombo Stock Exchange (CSE).

Rational multi-curve models with counterparty-risk valuation adjustments

We develop a multi-curve term structure set-up in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to London Interbank Offer Rate swaptions data and show that a rational two-factor log-normal multi-curve model is sufficient to match market data with accuracy. We elucidate the relationship between the models developed and calibrated under a risk-neutral measure and their consistent equivalence class under the real-world probability measure . The consistent -pricing models are applied to compute the risk exposures which may be required to comply with regulatory obligations. In order to compute counterparty-risk valuation adjustments, such as credit valuation adjustment, we show how default intensity processes with rational form can be derived. We flesh out our study by applying the results to a basis swap contract.

Too LIBOR, Too Late: Time to Move to a Market Rate

Barclays has been fined, the British have issued their report, and now the market is anxious for everything to go on as usual with the London Interbank Offer Rate (“LIBOR”). I think that would be a serious mistake. The U.S. and British investigations into rate-fixing by Barclays revealed a widespread culture of pervasive, deceitful conduct in the setting of the most important private sector benchmark for over $300 trillion in derivative contracts and $10 trillion in adjustable-rate loans. It is highly unlikely that Barclays was the only major bank engaging in this conduct, and public investigations and private lawsuits against a range of participants in LIBOR rate-setting are likely to reveal further misconduct in the months ahead. The basic structure for the setting of LIBOR is fundamentally flawed. It permits banks with obvious conflicts of interest to skew the LIBOR rate in order to benefit their own firm. Barclays, for example, was alleged to have attempted to manipulate LIBOR to benefit its traders and to hide its growing costs of borrowing in the financial crisis. The LIBOR structure also facilitates collusion among the rate-setting banks, in violation of the antitrust laws. Barclays, for example, was alleged to have attempted to manipulate LIBOR in collusion with other firms to benefit particular trades over a number of years. Both public antitrust investigations and a range of private lawsuits are likely to be pursued with vigor in the coming months. The collusion and manipulation were alleged to have occurred during both quiescent markets and turbulent ones. That is, the attempted manipulation of LIBOR was apparently not confined to one extraordinary “once-in-a-lifetime” financial crisis, when extreme market pressures might have lured firms to engage in this unlawful conduct, but rather was ingrained in the regular setting of rates. As it currently stands, LIBOR is not a market interest rate. It provides the illusion of market rates that are relied upon by everyone from sophisticated derivative traders to ordinary mortgage borrowers, but the rate itself is pure fiction. Banks submit a rate at which they supposedly could borrow, but there’s no requirement that the rates submitted be based on actual transactions. As Mervyn King, Governor of the Bank of England put it, LIBOR represents “the rate at which banks do not lend to each other.”

Dependence structure between LIBOR rates by copula method

This paper discusses the correlation structure between London Interbank Offered Rates (LIBOR) by using the copula function. We start from one simplified model of A. Brace, D. Gatarek, and M. Musiela (1997) and find out that the copula function between two LIBOR rates can be expressed as a sum of an infinite series, where the main term is a distribution function with Gaussian copula. Partial differential equation method is used for deriving the copula expansion. Numerical results show that the copula of the LIBOR rates and Gaussian copula are very close in the central region and differ in the tail, and the Gaussian copula approximation to the copula function between the LIBOR rates provides satisfying results in the normal situation.

The Role of Ethics in the Anglo-Saxon Financial System

The current process of the globalization of finance has showed significant questions related to the behaviour of market participants and to the ethical dimension of business operations, particularly in the Anglo-Saxon financial system. In this context, the recent banking and corporate scandals (such as, for example, the collapse of Northern Rock, Lehman Brothers and the manipulation of the London Interbank Offered Rate – LIBOR) revealed the problematic relationship between some financiers and ethics. This paper attempts to argue that the Anglo-Saxon financial market is centred on an attention to increase in profit, an objective which comes under a regulatory framework marked by the adoption of “principles-based” schemes and forms of self-regulation. For this reason there is a need to give particular attention to the proper functioning of financial relationships, with a view to safeguarding the interests of all actors who operate in the market. As a result, the achievement of acceptable levels of ethics depends on “prudent management” and, therefore, on the ability of intermediaries to pursue operational conducts based on fairness and transparency.

Financial Market Misconduct and Public Enforcement: The Case of Libor Manipulation

Using comprehensive data on London Interbank Offer Rate (Libor) submissions from 2001 through 2012, we provide evidence consistent with banks manipulating Libor to profit from Libor-related positions and to signal their creditworthiness during distressed times. Evidence of manipulation is stronger for banks that were eventually sanctioned by regulators and disappears for all banks in the aftermath of the Libor investigations that began in 2010. Our findings suggest that the threat of large penalties and the loss of reputation that accompany public enforcement can be effective in deterring financial market misconduct. This paper was accepted by Adams, Renee, finance.

On the Time-varying Linkages among the London Interbank Offer Rates for Major European Currencies

We employ an asymmetric dynamic conditional correlation model to investigate the time-varying integration of the London Interbank Offered Rate (LIBOR) rates for three major European currencies ‒the euro (EUR), Swiss franc (CHF), and British pound (GBP). We assess the impacts of the global financial crisis and the European sovereign debt crisis on cross-currency dynamic correlations. Our findings suggest that the correlations are influenced more by negative innovations than by positive ones for the GBP-CHF and CHF-EUR pairs. While the global financial crisis increased the degree of interbank money market integration, the European debt crisis contrastingly decreased the dynamic correlations for each pair of LIBOR rates.

Transmission of Shocks to LIBOR Risk Spreads and Nominal Risk-Free Rates

In this study, effects of shocks to international money market conditions, as measured by the three-month London Interbank Offer Rates (LIBOR) for five financially integrated economies (United States, the euro zone countries, Great Britain, Japan, and Canada) are examined. The sample period runs from January 4, 1999, through December 31, 2010. A fiveequation vector autoregressive (VAR) model is developed using daily risk spreads between each country’s LIBOR and its nominal risk-free rate. Also, effects of the risk spreads on the respective nominal risk-free rates are identified in a separate VAR system. Based on the risk-spread VAR, effects of exogenous shocks are examined. Single-country impulse tests show that the feedthrough effects on the other countries are surprisingly limited for these integrated countries. Only when a shock is applied concurrently to all five risk spreads can effects on the magnitude noted in 2008 and 2009 be replicated, suggesting that all LIBOR rates were affected by a contemporaneous shock. Finally, a proportion of the shock to the risk-spread feed has an inverse effect on each country’s nominal risk-free rate, reflecting the effect of the flow of funds from risky assets to safe assets in a time of increased risk and vice versa.

Important Warning Indicators on Financial Crisis and Dynamic Switching of Gold Pricing Models

In this paper, the global financial crisis which began in 2007 is divided into four stages by the switching of the leverages between financial system and governments. Gold, as one of the most important reverse calibration variables for global macro cycles, has switched its pricing models four times correspondingly.In the first stage, from August 2007 to June 2009, with the U.S. financial system deleveraging, the gold price was running according to the three-factor model. In the second stage, accompanied by the added leverage of global governments, the gold price ran according to the U.S. real interest rate model. In the third stage, the financial market's focus shifted to the European sovereign debt crisis in February 2010, the gold price ran according to the European sovereign CDS (Credit Default Swap) model. The European countries were deleveraging in the third stage. Finally, gold turned back to the three-factor model. The trigger was the U.S. Federal Reserve's OT (Operation Twist) policy and the German Constitutional Court's legality adjudgement for the German government to aid Greece and other European countries. Both occurred in September 2011.Further, we find that the OIS (Overnight Indexed Swap), the LIBOR-OIS spread (London InterBank Offer Rate) and the TED spread can be considered as the observation variables for the switching of the gold pricing models. These variables are usually considered as a warning to the liquidity risk of the financial institutions.In general, gold, if not the only one, will be one of the most important assets in revealing the four stages of the financial crisis.

The impact of a new term auction facility on Libor–OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis

During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor–OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor–OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead–lag relation between Libor–OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead–lag relations and one-way volatility transmission between these markets.

Maximum penalized quasi-likelihood estimation of the diffusion function

We develop a maximum penalized quasi-likelihood estimator for estimating in a non-parametric way the diffusion function of a diffusion process, as an alternative to more traditional kernel-based estimators. After developing a numerical scheme for computing the maximizer of the penalized maximum quasi-likelihood function, we study the asymptotic properties of our estimator by way of simulation. Under the assumption that overnight London Interbank Offered Rates (LIBOR), the USD/EUR, USD/GBP, JPY/USD, and EUR/USD nominal exchange rates, and the 1-month, 3-month Treasury bill yields, and 30-year Treasury bond yields are generated by diffusion processes, we use our numerical scheme to estimate the diffusion function.

The Term Structure of Interest-Rate Futures Prices

We derive general properties of two-factor models of the term structure of interestrates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the term structure shifts and tilts as the factor rates vary. The cross-sectional propertiesof the model derive from the solution of a two-dimensional, autoregressive process for the short-term rate, which exhibits both mean-reversion and a lagged persistence parameter. We show that the correlation of the futures rates is restricted by the no-arbitrage conditions of the model. In addition, we investigate the determinants of the volatilities and the correlations ofthe futures rates of various maturities. These are shown to be related to the volatility of the short rate, the volatility of the second factor, the degree of mean-reversion and the persistence of the second factor shock. We also discuss the extension of our model to three or more factors. We obtain specific results for futures rates in the case where the logarithm of the short-term rate [e.g., the London Inter-Bank Offer Rate (LIBOR)] follows atwo-dimensional process. We calibrate the model using data from Eurocurrencyinterest rate futures contracts, using alternative optimization criteria. We then derive the term structures of volatilities and correlations implied by the model.