NYSE Euronext opens new front in London with oversight of Libor

NYSE is replacing British Bankers’ Association in administering Libor

NYSE Euronext, whose strength in European derivatives helped draw IntercontinentalExchange Inc. into a deal to acquire it, is adding to its business in London.

The New York Stock Exchange operator said yesterday it will replace the British Bankers’ Association in administering the London interbank offered rate, vowing to restore confidence to the benchmark amid a rigging scandal that has generated $2.5 billion in fines. More than $300 trillion in securities are benchmarked to the rate, which has been regulated by the U.K. Financial Conduct Authority since April as part of an overhaul.

The transfer in 2014, criticized by a member of the U.S. Commodity Futures Trading Commission, raises the European profile of NYSE. The exchange owns the London-based Liffe derivatives market and is being acquired by IntercontinentalExchange for about $10 billion. U.K. regulators recommended that the BBA be stripped of responsibility for Libor after finding banks had tried to manipulate it to profit from bets on derivatives.

“Exchanges are ideal ‘aggregators’ for important market-sensitive information such as Libor and derivatives,” said Bruce Weber, dean of the Alfred Lerner College of Business and Economics at the University of Delaware, in an e-mail. “The exchange will make the instrument’s reporting entities give credible disclosures and the number will be made tradable.”

Liffe, Europe’s second-largest derivatives exchange, offers Libor-based short sterling futures and Euribor, dominating the market for trading of short-term interest rate products. Ownership of that business means it’s in Liffe’s interest that investors have confidence in Libor, according to Finbarr Hutcheson, chief executive officer of Liffe.

Restoring Credibility

“Our primary focus is restoring the credibility and integrity of Libor, which we think will be an important benchmark for years to come,” Hutcheson said in an interview today. “We’ll run it as a commercial business, but our role in restoring the market’s trust in Libor is our biggest concern.”

The rate is at present calculated by a poll carried out daily by Thomson Reuters Corp. for the BBA that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The top and bottom quartiles of quotes are excluded, and those left are averaged and published for individual currencies in London.

NYSE Euronext will establish a unit for the business, NYSE Euronext Rate Administration Ltd. Decisions on who will calculate the rate, what banks will submit to it and how the process will work have yet to be completed, according to Liffe’s Hutcheson. The unit will be run autonomously with separate staff that review the process of rate-setting.

Rate Setting

“We had a ‘fox guarding the henhouse’ issue here, and we should learn from that,” Bart Chilton, a Democrat on the CFTC, wrote in an e-mail. “I firmly believe that having a truly neutral third party administrator would be the best alternative, and I’m not sure that an exchange is the proper choice.”

As the administrator, NYSE will be responsible for corroborating banks’ submissions to the rate, ensuring they are based as closely as possible on actual trade data, and monitoring suspicious conduct, according to rules introduced by the FCA earlier this year.

Thomson Reuters will have no role in the rate-setting process once responsibility has transferred to NYSE, said Thomson Reuters spokeswoman Yvonne Diaz.

FCA Probe

In its probe of Royal Bank of Scotland Group Plc, the U.K. Financial Conduct Authority said the firm made at least 219 documented requests for inaccurate submissions to Libor. Derivatives traders sat next to Libor submitters “and encouraged the two groups to communicate without restriction despite the obvious risk that the derivatives traders would seek to influence” submissions, the regulator said. RBS was fined $612 million.

Barclays admitted to attempting to rig rates to benefit its own derivatives trades and to appear healthier during the financial crisis by hiding its true cost of borrowing. Authorities including the CFTC and the U.S. Department of Justice are also conducting civil probes, while the DOJ and U.K. Serious Fraud Office are pursuing criminal investigations.

“NYSE Euronext Rate Administration plans to return credibility, trust and integrity to Libor, bringing an essential combination of strong regulatory framework and market-leading validation techniques,” Liffe’s Hutcheson said.

NYSE Takeover

ICE, the energy and commodity futures bourse in Atlanta, agreed on Dec. 20 to acquire NYSE Euronext for cash and stock, seeking to expand into interest-rate futures. That market in the U.S. is dominated by CME Group Inc., the world’s largest derivatives exchange. CME offers the Libor-based Eurodollar contract while NYSE Liffe US offers a rival Eurodollar contract.

“I don’t see any change for us from this,” Terry Duffy, chairman of CME said today in London. “I don’t ever see it being a proprietary index. If you were going to make it a proprietary index, you wouldn’t sell it for a buck.”

NYSE Euronext exchanged 1 pound to take over the business, according to James Dunseath, a NYSE Euronext spokesman.

Skepticism toward Libor has been expressed by other CFTC members. Gary Gensler, the regulator’s chairman, has said benchmarks such as it and Euribor that are based on banks’ estimates are “unsustainable” and should be replaced with alternatives based on real data.

Changing the administrator won’t address Libor’s underlying problems, such as its use of estimates and an increasing propensity of banks to leave their submissions unchanged, according to Rosa Abrantes-Metz, an economist with New York- based consulting firm Global Economics Group Inc. and a professor at New York University’s Stern School of Business.

‘Fundamental Problems’

“The fundamental problems are still there,” she said. “Libor represents a market that almost doesn’t exist and is disappearing further over time.”

Bids to run the Libor benchmark were assessed on criteria such as “technical capability, governance and oversight,” Martin Wheatley, chief executive officer of the FCA, told reporters in London today. NYSE Euronext “came out as the clear favorites to restore confidence in the system,” he said.

The U.K. government formally started the search for a replacement body to set Libor in February after the BBA voted to relinquish operation of the benchmark. A seven-member panel including Sarah Hogg, outgoing chairman of the Financial Reporting Council, Wheatley, and the Bank of England’s Paul Fisher recommended the new administrator.

Restoring Credibility

“This change will play a vital role in restoring the international credibility of Libor,” Hogg said in a statement. NYSE Euronext Rate Administration Ltd. will be a U.K. based company, and will be regulated in the U.K. by the FCA.

Under rules introduced by the FCA, the administrators of the rate and banks that participate will have to appoint a person approved by the regulator to oversee compliance. The BBA has also stopped quoting Libor for two currencies and eight maturities in a bid to make the benchmark less vulnerable to manipulation.

Bloomberg LP, the parent of Bloomberg News, has proposed an alternative to Libor dubbed the Bloomberg Interbank Offered Rate, or Blibor. It would use data from a variety of financial transactions to reflect participating banks’ cost of credit.

Libor was first published by the BBA in 1986, the year the British Prime Minister’s “Big Bang” program of deregulation fueled a boom in London’s bond and syndicated-loan markets. Originally intended to be a simple benchmark that borrowers and lenders could use to price loans, the rate grew in importance as it was adopted as the basis for setting interest rates from mortgages and student loans toderivatives.

Largest Banks

The BBA, whose members are among the world’s largest banks including those who contribute to Libor, was criticized by policy makers in the U.K. and the U.S. for failing to address concerns about the rate-setting process first raised by then New York Fed President Timothy F. Geithner in 2008.

“Restoring confidence in Libor has been an absolute priority for the BBA,” Anthony Browne, CEO of the lobby group, said in a statement. “We have been working hard with regulatory authorities and the government to put in place much-needed reforms to the system.”


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