The attacks on Libor continued unabated. The British Financial Services Authority, the U.S. Commodity Futures Trading Commission, Justice Department, Federal Trade Commission and the SEC have all launched investigations.
“The complaints are substantially similar and allege, through various means, that certain members of RBS Group and other panel banks individually and collectively violated U.S. commodities and antitrust laws and state common law by manipulating Libor and prices of Libor-based derivatives in various markets,” RBS said in August.
In April, a European asset management firm and two funds accused 12 banks, including Bank of America, Barclays, Citigroup, Credit Suisse, HSBC and J.P. Morgan Chase, of conspiring to manipulate Libor. FTC Capital of Vienna, FTC Futures Fund PCC of Gibraltar and FTC Futures Fund SICAV of Luxembourg alleged in U.S. District Court that the banks had distorted the value of futures contracts used by traders and investors to speculate on the direction of interest rates.
“My client’s trading of euro-dollar futures was harmed as Libor was not fairly priced,” says David Kovel, who represents FTC Capital. Kovel didn’t identify specific trades that resulted in losses, nor did he reveal how much FTC Capital is seeking from the banks.
Marco Bianchetti, who holds a PhD in theoretical condensed-matter physics from the University of Milan and works on the market risk management team at Intesa Sanpaolo, says quantitative analysts who engineer financial transactions need a reliable benchmark.
He says a rate based on transactions would be more trustworthy than Libor. British Debt Management Office chief executive Robert Stheeman agrees. While he says he doesn’t question the integrity of Libor, Stheeman says he’s concerned about its authority as a benchmark.
“That, to me, is the real issue,” he says.
In that spirit, the search is on for Libor alternatives. In Britain in June, the Wholesale Markets Brokers’ Association launched a reference rate called the Repurchase overnight index average, or Ronia. It’s based on actual money-market deals struck from noon to 4:15 p.m. London time.
Roberto Verrillo, a managing director of British interest-rate products at Nomura International in London, helped to develop Ronia. He says Ronia’s advantage over Libor is that it’s based on real deals.
As influential as Libor is today in determining interest rates around the world, Peter Hahn, a professor of finance at Cass Business School in London and a former managing director at Citigroup, says its authority may slowly ebb away.
“As it becomes less relevant, it becomes even more unreliable,” Hahn says. “It’s up to the market to come up with alternatives that have a lot more integrity and aren’t as influenced by the conflicted interests of their participants. The battle is on for a new, more credible alternative to Libor.”
The full version of this Bloomberg Markets article appears in the January edition.