LIBOR – will it, should it ever be the same?
David Millar, risk trainer and former COO at PRMIA, feels following the possible LIBOR rate fixing scandal, we should be looking at a mathematical and transparent way of fixing global base rates. March 23, 2012 | David MillarAnachronism - something that is chronologically out of place; especially something from a former age that is incongruous in the present. I can’t think of anything better to describe the London Interbank Offered Rate (LIBOR) to its friends. It feels as if it has been around for centuries but in fact it is only just over 25 years old having been officially launched on the 1st January 1986. It was created to satisfy a demand. In the 1980s the interbank lending market increased exponentially lead by the growing fixed-rate mortgage market and the consequent need for risk management hedging tools. New derivative instruments were launched including forward rate agreements, interest rate swaps, swaptions and currency futures. All these needed agreements on interest rates. Constantly renegotiating these for each new contract was time consuming and was inhibiting the market for these new instruments. A base rate was needed so that contracts could refer to this and set their agreed rates as an off-set of this rate. However this rate had to reflect the interbank market and could not be a government policy set rate as in the case of minimum lending rates set by the central bank. The British Bankers’ Association (BBA) stepped in and set up a process whereby a rate could be agreed, and, as London was the centre of the global interbank market, this rate became the global standard. From the start the setting of the rate has been fairly arbitrary being an average of the rates that are submitted by a group of banks, the “Contributor Panel”, as representative. To quote the LIBOR rules, Libor is defined as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11am London time. This rate, actually a large number of rates for ten currencies and different maturities, is therefore only each bank’s perception of its cost o... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Capital & Strategic Issues, Regulation, Risk and RegulationCapital & Strategic Issues,riskregulation,Risk and Regulation, Capital & Strategic Issues,Regulation,Risk and Regulation, Keywords:Market Risk, LIBOR, Interbank Rates, Money Markets Market Risk, LIBOR, Interbank Rates, Money Markets
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