According to Andrew Bailey, the head of the UK Financial Conduct Authority, the London interbank offered rate (Libor) will be scrapped by the end of 2021. The British regulator intends to phase out the key interest benchmark, which is the underlying rate for over $350 trillion dollars of financial products, and bring in new measures that are more connected with the lending market.
One potential replacement reportedly under consideration is contracts with the Sterling Overnight Index Average, also known as Sonio. This alternative derivatives reference rate is almost free of risks and deals with overnight funding rates in the unsecured sterling market. Another option being explored is the Treasuries repo rate, which is tied to the cost of borrowing money that has been secured against US government debt.
Libor is set by 20 banks that every day turn in the rates at which they are ready to lend to other banks at different maturities and in five currencies over certain time periods. It has a global impact. Libor is used for setting the price that businesses should pay for loans and people should pay for mortgages. It also is a factor in derivative pricing.
Unfortunately, in the Libor rigging scandal, which peaked in 2008, a number of banks were accused of modifying their Libor submissions to benefit fellow traders and themselves instead of being an accurate reflection of the rates at which loans were being made. Since then, some of the biggest banks in the world, including Deutsche Bank (DB), UBS (UBS), and Royal Bank of Scotland (RBS) have collectively paid over $9B to settle the Libor rigging allegations.
Addressing the intended phase out, Bailey said that the reason for this decision was that Libor wasn’t “sufficiently active” enough anymore to remain as a benchmark. He said that that FCA has worked hard to convince the bank to keep turning in rates but insufficient liquidity continues to keep Libor open to rigging. That said, the decision to put an end to Libor doesn’t excuse the behaviors of those accused of benchmark manipulation, including five ex-bankers who are in prison in England and several who were convicted in the United States.
Prosecuting Those Accused of Libor Rigging Continues to Be Challenging
However, successfully going after those accused of rigging Libor isn’t always easy. In the UK, over the last two years, eight ex-trades were acquitted. This month, the United States Court of Appeals for the Second Circuit not only dismissed the convictions of two ex-Rabobank (RABO) traders in the first criminal case alleging the rigging of this benchmark, but also it threw out the indictments against them. The court found that Anthony Conti and Anthony Allen’s Fifth Amendment right against self-incrimination was violated.
Conti and Allen had no choice but to testify in Britain as part of the FCA’s probe into Libor manipulation—either that or they would have gone to prison. Now, a Second Circuit three-judge panel is saying that US prosecutors improperly demanded the men’s testimony to get their indictment and send the two men to trial in this country.
It was in 2013 that Rabobank not only agreed to pay over $1B in civil and criminal penalties to resolve Libor rigging probes globally but also it admitted that its employees had engaged in criminal wrongdoing.
Libor Funeral Set for 2021 as FCA Abandons Scandal-Tarred Rate, Bloomberg, July 27, 2017
Convictions of 2 Former Traders in Libor Scandal Are Dismissed, NY Times, July 19, 2017