Article 8.2 Intercontinental Exchange to take over running Libor benchmark

By Philip Stafford

Financial Times January 17, 2014

Intercontinental Exchange will take over the administration of the scandal-tainted Libor benchmark from February 1 after receiving approval from UK regulators on Friday.

The US derivatives exchange has also appointed Andre Villeneuve, a senior City executive, as chairman of the ICE subsidiary that will collate and monitor the data submitted by banks.

The handover of administration to ICE from the British Bankers' Association will mark the first steps to rehabilitate the benchmark, which has been tarnished after allegations it has been manipulated by banks around the world. More than ˆ2bn has been collected in fines by regulators after a string of financial institutions, including RBS, UBS and Barclays settled charges.

ICE has been in line to run the process since its purchase of NYSE Liffe, the London derivatives exchange, in November. NYSE won the contract to replace the BBA last year. It plans to move calculation of the benchmark away from the theoretical price quotes submitted by banks to a fixing based on real transactions.

However, ICE said there would be no immediate change to the calculation of Libor. The group is currently moving the technology platform from a NYSE-owned system to one overseen by ICE.

FT

Source: Stafford, P. (2014) Intercontinental Exchange to take over running Libor benchmark, Financial Times, 17 January.

The IBA continues to administer Libor in much the same way as the BBA, with a panel of banks submitting seven different maturity rates for five currencies: the US dollar (USD), the British pound (GBP), the euro (EUR), the Swiss franc (CHF) and the Japanese yen (JPY). The highest and lowest 25% of submissions are removed and the remainder averaged to give each rate. This trimming of the top and bottom quartiles allows for the exclusion of outliers (potentially freakishly extreme numbers) from the final calculation.

The submitting banks for each currency are shown in Table 8.3. IBA asks the panel banks to inform Thomson Reuters of the rates they might be asked for if they were to borrow using the same question that the BBA employed. The rates are published and distributed by the ICE Benchmark Administration. The www.global-rates.com website, run for IBA, shows Libor rates updated daily at around 6pm (CET) so that those of us without the expensive computer systems showing the 11.45am postings can also see the rates.

The current system tries to place more emphasis on actual market transactions, but frequently this is not possible due to lack of lending that day for that particular maturity and currency, especially problematic in times of market turmoil. Then the IBA allows the submitters to use ‘qualitative criteria' and ‘expert judgement' to estimate the rate they would be charged should they

Table 8.3 ICE Libor panel banks

Source: Data from www.theice.com/iba/libor

borrow. ICE would like to move to a system that also takes into account interest rates in the commercial paper and certificates of deposits markets - see Article 8.3. There are voices saying that the compromise of allowing estimates alongside actual rates is not going far enough, that all submissions should be on actual deals - see Article 8.4. Other prominent people such as regulators ponder whether it is best to move towards two systems running in parallel, and this is something which the new administrator, ICE Benchmarks Limited, and the FCA will have to resolve.