Of Special Interest


[x] [x]

24th July 2012

Libor, the BBA and Thomson Reuters

An impression has been given by some media, politicians and even some regulators that Libor has been calculated and conducted in some amateur or casual way. Secondly that the 2008 reforms to the calculation were not of consequence.

It is not widely known that the calculation of the Libor rates has been contracted out by the British Bankers Association to Thomson Reuters for many years. It has been Thomson Reuters responsibility to ensure all the necessary input information from the panel member banks was obtained. Amongst the changes made in 2008 was the questioning of a submitter should a bank's submission show unexpected variance. Specifically if:

"- submissions are more than two standard deviations from the previous fix for that maturity.

- the submissions should move the contributor from materially above to materially below the fix, or vice versa.

- any submissions that are more than approximately 5bp higher or lower than the previous submission, unless the majority of the rest of the panel have also moved the same amount in the same direction. In this latter case, Thomson Reuters will provide the data and the LIBOR manager will investigate the nature of such a market-moving event and discuss with the FX & MM Committee."

Elsewhere the 2008 changes paper goes on to detail:

"If a submitted rate triggers a query, Thomson Reuters will immediately contact the bank in question and ask it to confirm its rate. Contributions that do not conform to the expected norms are usually a result of an error that is quickly rectified. This is an extension of current practice. If a bank confirms that it intends to submit a rate that would still trigger an alert, Thomson Reuters will contact the LIBOR manager who will ask the bank its reasoning for the submission. Each time this occurs, the LIBOR manager will log the circumstances and include full details in the regular report to the FX & MM Committee. Discussion of this report will be a standing agenda item at Committee meetings. Details of the report and discussions thereof will be confidential, and members may not disclose any information outside the committee meetings.

"If, in the view of the LIBOR manager, a bank’s submitted rate is aberrant or the bank’s explanation for its submission is unsatisfactory, the LIBOR manager will inform the Fixings Sub-committee who will meet to consider the issue"

An internet feedback page where any professional could question a rate they felt did not reflect the true market position. In addition Clifford Chance was employed to review the process from a legal point of view.

How the 2008 changes worked in practice should be of key interest to the Treasury Select Committee and its investigation into Libor manipulation. Angela Knight, Chief Executive, recently left the BBA after five years in the role. It has just come to light that John Ewan, Libor manager for some years has also departed the organisation. The BBA is to defer appointing a replacement until after the investigations into manipulation. One of Ewan's former deputies is to take on the responsibility. The BBA was not revealing his name.