1. LIBOR Fixing Scam
“ This dwarfs by orders of magnitude any
financial scam in the history of markets.
“
Assignment – 1
Banking & Financial Institutions and Markets SPJIMR
Durgesh Singh Anant Damle
Group
Karan Miglani Vipin Mohan
Ankita Biyani
Angshuman Adhikari
Sreekanth Daruvuri
2

2. Agenda
What is LIBOR?
Current LIBOR Process
Spread & Impact of
manipulation
New Regulations

3. The LIBOR is the average interest rate estimated by leading banks in
London that they would be charged if borrowing from other banks
Pre-conditions
28 Yrs 64 Contributions must represent rates
Established in Nations formed in London and not elsewhere
1984 by BBA represented
LIBOR Highlights
Rate submitted should be formed
from that bank’s perception of its
223 5 cost of funds in the interbank market
Must be for the currency concerned,
Total Types of not by borrowing in other currency
Members stakeholders via FX markets
Rates must be submitted by staff at a
10 15 bank responsible for bank’s cash
management
Quoted Quoted Fund is an unsecured interbank cash
Currencies Maturities or cash raised through issuance of CD
A virtual borrowing rate for select banks which forms the benchmark for borrowings
LIBOR in rest of the world for various financial products in underlying and derivatives

4. The most widely used reference rate in the world is LIBOR, basis for
international borrowings
Rates fixed to
Products using LIBOR USD–LIBOR Currencies Quoted
Australian Canadian
Standard
Interbank
Commercial
Field
Hybrid MIBOR dollar (AUD) dollar (CAD)
Swiss franc Danish krone
(CHF) (DKK)
SIBOR
Euro British pound
Global exposure to LIBOR (EUR) sterling (GBP)
HIBOR
45 % $350 tn Japanese yen
(JPY)
New Zealand
dollar (NZD)
Mortgage indexation Derivative underpins
of US to LIBOR to LIBOR KIBOR Swedish krona
(SEK)
U.S. dollar
(USD)
3-major classifications of interest rate fixings instruments which often use the Libor
SCOPE as reference rate

5. Individual LIBOR rates are calculated based on submissions from
contributor banks averaged under a "trimmed mean" methodology
11 AM 12 PM REST OF DAY
TR calculates rate.
An INDIVIDUAL at the Data distributed
Apply Governance &
bank determines day’s simultaneously to TR Data stored
Scrutiny Protocols.
LIBOR submissions networks, users and in TR
Compiles stats for
distributors historical DB
FX & MMC
Contributor Bank Thomson Reuters Thomson Reuters
Monitors quality of
data inputs into LIBOR Monitor data and
and performance of TR improve governance
and informs Board and and scrutiny regime,
FX&MMC of market design & operation
LIBOR Ltd. FX & MM Committee
At what rate could you borrow funds, were you to do so by asking for and then
Process accepting inter-bank offers in a reasonable market size just prior to 11 am?

6. The scandal arose when banks falsely inflated or deflated their rates
to profit from trades, or to project false creditworthiness
Pls go for 5.36 LIBOR again, very
important that the setting comes
as high as possible ... thanks.
Hi Guys, We got a big position in
3m LIBOR for the next 3 days. Can
we please keep the lib or fixing at
5.39 for the next few days. It
would really help. We do not want
it to fix any higher than that.
Thanks a lot.
It’s just amazing how Libor fixing
can make you that much money
or lose if opposite. It’s a cartel
now in London.
SCANDAL The first reports of unsound foundations were published by WSJ in 2008

7. Regulatory lapses and false confidence in free markets has resulted in
turn of events of catastrophic magnitude
27/6 6/7 28/9
Admits to Start Criminal BBA removed, 2012
LIBOR Investigation Replaced with
misconduct of LIBOR fixing data providers
Barclays SFO FSA
Primary Causes
2008 Conflict of Lack of
11/4 16/4 Interest Oversight
Investigation on Study casts
Barclays for doubt on Key Lack of
under-reporting Rate External
NY Fed WSJ Accountability
Speculatory and disgraceful behaviour in determination of an international key rate
SCANDAL has resulted large-scale process re-engineering

8. Effect of LIBOR correction will result increased risk for all market
participants and greatly diminished short term returns
Statistical analysis indicated that the Libor
Mortgage rates
on reset date
rose consistently on the first day of each
month between 2000 and 2009 on the
day that most adjustable-rate mortgages
had as a change date on which new
repayment rates would "reset"
The manipulation of Libor caused
Derivative
payments on interest rate swaps to be
Returns
smaller than they should have been,
resulting in high losses to derivative
market participants
The inaccuracy of LIBOR to capture macro-economic risk has resulted in wide-spread
EFFECT risk leakage into the system

9. Regulations are being put in place to improve LIBOR determination
and related processes throughout the WORLD
• The merits of alternative
Immediate Action • Regulatory compulsion
reference rates for
to participate
Long Term
certain applications and
• Remove sparsely used
the roles should be
Wheatley Report
currencies and tenors
analysed and if merited
• Regular publication of
should be transitioned to
statistical bulletin
Institutional Reforms
• New organisation for • FSA as interim controller
• Establish strict process
Governance
LIBOR computation
• Operate under for submission
Governance Council verification through
market data
• External Audit of
submitting firms
REGULATION Strong Regulation is the need of hour

10. THANK YOU