Posted on 09 Jul 2013 by Neilson
The London interbank offered rate won't be owned by London much longer.
Libor, the scandal-tarred benchmark that underpins interest rates on trillions of dollars in financial contracts, is being sold to NYSE Euronext, the U.S.-based company that runs the New York Stock Exchange. The deal, designed to restore Libor's international credibility, was announced Tuesday by a British government commission and the NYSE.
Since its inception in the 1980s, Libor has been run by the British Bankers' Association, a London-based trade group whose members are some of the world's biggest banks. But the rate has been engulfed in scandal in recent years, due to attempts by a number of banks to manipulate the rate for their own financial gain. Three banks have settled rate-manipulation charges, agreeing to pay a total of roughly $2.5 billion in penalties to U.S. and British regulators.
The deal means that the City of London will lose one of the institutions most closely associated with its rise as a global financial hub in recent decades. The new owner will be the institution that is most closely associated with Wall Street.
At the same time, the transaction highlights the rise of companies such as NYSE Euronext into major players in the markets for financial derivatives. Libor and other related benchmarks serve as key components in many of those derivatives contracts, which are traded on exchanges owned by NYSE Euronext. The company itself is in the process of being acquired by IntercontinentalExchange Inc., an Atlanta-based company that operates exchanges around the world.
British authorities last year started looking for a new owner for Libor, after concluding that a bank-lobbying group shouldn't be responsible for administering a key benchmark. After a competitive bidding process, a government-appointed commission picked NYSE Euronext, which will formally take over Libor early in 2014.
Terms of the deal weren't announced. The BBA hasn't disclosed the revenue it generates from Libor, but people familiar with the finances in the past have said it historically was in the millions of pounds.
Sarah Hogg, who headed the U.K. commission that ran the Libor sale process, said Tuesday that handing the benchmark to NYSE Euronext "will play a vital role in restoring the international credibility of Libor."
As part of its acquisition of Libor, NYSE Euronext will set up a new U.K. legal entity, NYSE Euronext Rate Administration Ltd., to administer the benchmark. That subsidiary will be regulated by the U.K.'s Financial Conduct Authority.
Martin Wheatley, the head of the FCA, said he expects NYSE Euronext "to develop further the oversight and governance of Libor." The chief executive of the NYSE Liffe derivatives exchange, Finbarr Hutcheson, sounded a similar note, saying the company would continue "the process of restoring credibility, trust and integrity in Libor as a key global benchmark."
At least initially, NYSE Euronext is expected to continue the current process for calculating Libor, basing the rate on daily estimates from banks about how much it would cost them to borrow money from other banks, according to a U.K. Treasury official. That process will be supplemented by cross-checking those submissions against market transactions, the official said.
In the future, the new owner plans to work with market participants and regulators to "evolve how Libor is calculated" to bring it in line with recommendations last year from another U.K. commission, the official said.
The U.K. Treasury said the move marked the latest step in a broader government effort to develop a stronger banking sector, which has included introducing a new criminal offence for the manipulation of Libor and setting up the independent commission to recommend an appropriate successor to the BBA as the Libor administrator.
Tuesday's move shifts responsibility for Libor to one of the world's largest derivatives-exchange operators, whose contracts linked to interest rates rank among the world's most heavily traded. Banks, hedge funds and insurance companies use the products to shield themselves against shifts in borrowing costs, and to speculate on economic conditions. Exchanges have gravitated toward derivatives trading because the markets bring higher fees than trading in stocks.
From London, NYSE runs Europe's largest market in interest-rate futures in terms of trading volume. Its most popular contracts track short-term interest rates such as the euro interbank offered rate, or Euribor, a lesser-known cousin of Libor that is run by the European Banking Federation in Brussels.
Trading in contracts linked to Libor, however, is dominated by Chicago-based CME Group Inc. In June, CME handled trading of about 8.6 million interest-rate futures and options per day, underpinned by the Eurodollar contract, which tracks Libor. NYSE in recent years has tried to launch its own U.S. version of the contract, and offer a new alternative, though neither has gained major traction.