The LIBOR of a thousand faces

On 20 October 2014, ICE Benchmark Administration (IBA) published a position paper on the evolution of ICE LIBOR. The paper moves past the issues of manipulation and envisions a root and branch reform of the methodology.

As the new administrator of LIBOR since 3 February 2014, IBA found that each benchmark submitter has developed its own methodology for establishing LIBOR submissions.

In the view of making improvements to LIBOR, IBA has engaged with many senior representatives from the following international authorities: the FCA, the Bank of England, the Federal Reserve Board of Governors in Washington, the Federal Reserve Bank of New York, the Swiss National Bank, the Japanese Financial Services Agency, the Bank of Japan, the ECB and the CFTC. IBA now proposes to adopt a more unified transaction-based methodology.

The requirement to anchor LIBOR submissions in transactional data was initially part of the key recommendations from the Wheatley Review in 2012. More recently, the FSB similarly restated that IBORs (“IBOR+”) must be underpinned to the greatest extent possible to transaction data.

IBA recognises however that setting a transaction-based rate via a formulaic approach in the calculation process cannot work effectively in illiquid markets – volume in the inter-bank unsecured lending market has reduced significantly in the last few years. A significant number of tenors have already been discontinued due to a lack of liquidity, while the level of activity in some other tenors remains too low.

This issue proves particularly challenging to tackle. To get around it, IBA proposes a waterfall where various transactions types would be taken into account:

• Unsecured wholesale funding deposits
• Commercial Paper
• Primary issuance Certificates of Deposit
• Other transactions types, such as OIS, Repos, FX Forwards, FRAs and FRNs may also be included

In summary, the benchmark will cease to be based solely on indications of inter-bank funding. IBA holds the position that all wholesale and professional entities should be regarded as eligible counterparty types, including central banks and large corporates. Accordingly, LIBOR would echo bank funding more generally.

The paper indicates that some weightings, premia or discount may need to be applied to additional transaction types. The resulting IBOR would be a liquidity-proof, formulaic and reliable hodgepodge, although one might wonder what is left of the vintage, single-sourced, LIBOR benchmark beyond the name.

Comments must be received by 19 December 2014.

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