How to Get New Banks to Join the LIBOR Panel

Introduction "We cannot get new banks to join the LIBOR panel. This is unfortunate from my perspective. But you can understand the situation of a bank chief executive who has to explain to shareholders why the bank should join a LIBOR panel, given the past," said Finbarr Hutcheson, president at the Intercontinental Exchange (ICE) Benchmark Administration (Albanese, 2015, June 17). Mr. Hutcheson, a former chief executive of the NYSE Liffe, and a 15-year veteran of Goldman Sachs, had been chosen by ICE to lead the efforts to modify the methodology and procedures for the LIBOR computation (ICE, 2016). He needed to signal a clear break with past scandals, improve the index's shortcomings, and regain the trust of institutions, investors, and regulatory agencies. LIBOR was the acronym used for the London Interbank Offered Rate, perhaps the most important benchmark of the international financial system. Producing a robust and reliable index rate would promote the continuous development of the global financial sector, ensure the dissemination of fundamental pricing information, and facilitate international trade and exchanges. One way to make the LIBOR more robust was to increase the number of banks participating. Hutcheson was at the center of the social network that made up international banking. How could he use his leadership to encourage participation by more banks? LIBOR Manipulation Multiple financial institutions manipulated LIBOR over several years, finally resulting in jail sentences and heavy fines. Tom Hayes, the first convicted LIBOR-rigging participant, worked from the Tokyo derivatives trading desk and manipulated the yen LIBOR by convincing the rate submitters at his own firm and at other contributor banks to quote biased LIBOR rates to benefit his own trades. Between 2001 and 2010, Hayes made 1,200 requests to five brokers to rig Japanese yen LIBOR. His co-conspirators included a ring of traders at eight other banks, including HSBC, RBS, J.P. Morgan, Citigroup, and brokers at ICAP and RP Martin (Arvedlund, 2015). While at UBS, he generated $260 million in revenue for his employer (Fortado & Binham, 2015). Tom Hayes was just one of many LIBOR riggers; indeed, hundreds of managers, traders, and brokers working for global banks participated in the manipulation of LIBOR rates. Dozens of financial institutions were fined by U.S. and European regulators for collusion and interest rate rigging. ICE Benchmark Administration The Intercontinental Exchange became the LIBOR administrator in February 2014. ICE wanted to increase the number of participating banks above the 20 that participated before detection of the rigging scandal. ICE believed it could attract more contributing banks by using new technology to verify the information submitted. To safeguard the integrity of the process, ICE established oversight committees. These committees were made up of industry representatives who contributed by creating the LIBOR benchmark, participants who independently audited the process, and prominent financial institutions such as the Federal Reserve, the Swiss National Bank, and the Bank of England. Industry participants also thought more participants would create a more robust LIBOR benchmark. However, the scandal had resulted in $6 billion in fines to some of the world's biggest banks, and not all banks were eager to participate. Banks were afraid that public submission of honest estimates would reveal to the entire market their deteriorating creditworthiness, attracting scrutiny from regulators and increasing their funding costs. ICE Benchmark Administration (IBA), the benchmark administrator for the LIBOR, solicited and received feedback from more than 200 stakeholders over 18 months. IBA published a summary strategic document for LIBOR reform titled Roadmap for ICE LIBOR (2016, March 18). The purpose of the roadmap was to create a robust, sustainable LIBOR. The specific objectives for IBA were to (a) implement and use a uniform daily submission methodology, (b) publish a clear LIBOR definition, and (c) rely on transaction-based submissions. …