Transacting at Libor, bro | FT Alphaville

Transacting at Libor, bro

Another quote from the Barclays Libor files — from the CFTC itself:

In addition to the $200 million penalty, the CFTC Order requires Barclays to implement measures to ensure that its submissions are transaction-focused

Technically you don’t have to puzzle about what ‘transaction-focused’ means; definitions start on page 32 of the Order.

But given what Libor is post-crisis, in a way you do have to.

Let’s go back to something that was made abundantly clear way back during 2008. A time when Barclays senior management ordered that submissions to the Libor board be low-balled to calm “negative media speculation”. (“The origin of these instructions is unclear”, says the FSA Final Notice.)

Libor is reality-based fiction. Libor, an offered rate, is inherently drawn from what you would think other banks would think of your credit. “At what rate could you borrow funds, were you to do so”. Note the modal verbs.

As we all know by now, the fiction became hard to miss when unsecured transactions really did stop among banks. The Libor submissions couldn’t likewise stop: the rates which they inform must be fixed daily, across all sorts of currencies and maturities. That’s the full absurdity behind such statements as this:

….just set it where everyone else sets it, we do not want to be standing out

But our question is what happens if Libor-based bank funding trades haven’t really come back since the crisis, to the extent that they can support an index with the pricing influence of Libor.

So whither a transaction focus?

This is really Izzi’s point, about whether other indices which already use actual transaction data have stolen Libor’s thunder.

There’s another reason we’d like to bring up the transaction issue. The regulators found that Barclays attempted manipulation (notably in the derivatives trades), but did not say whether the bank did succeed – or could have succeeded – at it. Here’s Craig Pirrong

Proving this will be a very data intensive exercise. Moreover, there are two distinct issues-the impact of manipulation on the final settlement price of the futures contract (which is based on LIBOR), and the impact of manipulation on futures prices prior to expiration. The second issue will prove more challenging than the first because the connection is more direct in the final settlement price. Even that will pose some issues, however, because of the necessity of identifying the “but for”, i.e., what interest rate should banks like Barclays have reported. This will necessarily require looking at actual interbank transactions, raising the question of how many such transactions there will be during periods of time of money market stress starting in 2007.

Related links:
Libor highballs? – FT Alphaville
Euribor has been vaporised – FT Alphaville
Libor can be whatever you want it to be – Dealbreaker