From a culture of impunity to a culture of ethics: The LIBOR Manipulation
Rishi Hardowar
Abstract: LIBOR manipulation was the alleged result of a culture of impunity motivated by a perception that misconduct would be unpunished or undetected. This paper argues the regulatory responses to the LIBOR manipulations per se are insufficient. Only with a culture of ethics, working in parallel with regulations, can the industry overturn that culture of impunity. The paper goes on to analyse the significance of LIBOR and explain causes underlying the misconduct. A critical evaluation of regulatory reactions to the LIBOR manipulation determines the responses are not entirely effective. A robust culture of ethics substitutes in places where there is regulatory ineffectiveness, thus making it more likely to deter such manipulations in the future.
Introduction
LIBOR is an acronym for the “London Interbank Offered Rate,” that is, the rate at “which large banks indicate that they can borrow short-term wholesale funds from one another on an unsecured basis in the interbank market.”[1] LIBOR was first developed as “a contractually defined term in May 1970 to facilitate loan transactions.”[2]
LIBOR has two main functions in financial markets; firstly, as a reference rate on which “financial instruments can contract upon to establish the terms of agreement”[3] and secondly, a benchmark rate which serves as a “performance measure, often times for investment returns or funding costs.”[4]
Three important aspects of LIBOR changed over time, firstly, the LIBOR question on which submission rates are based, secondly, the LIBOR administrator and thirdly, the number of rates in which LIBOR is published daily.[5]
Firstly, the LIBOR question, on which submitter banks base their submissions on, changed in 1998 “from a rate at which the submitter believed a prime bank would be offered deposits to a rate at which the panel bank itself could borrow funds.”[6] The question on which rates are submitted as from 1998 is as follows: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”[7] Following the LIBOR scandal, over and above making LIBOR administration a regulated activity, the Wheatley report[8] led to a change in the LIBOR administrator in January 2014, from the British Bankers’ Association to the Intercontinental Exchange Benchmark Administration (ICE Group).[9] Further, not only were submissions[10] to be based on actual transactions but there was a change in the number of LIBOR rates produced on a daily basis.[11]
The LIBOR manipulation was the alleged result of a “culture of impunity in many parts of the market, coloured by a perception that misconduct will either go unpunished or undetected.”[12] The objective of this paper is to show that the regulatory responses to the LIBOR manipulations per se are insufficient. Only with a culture of ethics, alongside regulations, will the response be effective in overturning that culture of impunity
* Rishi Hardowar is a State Counsel at the Office of the Director of Public Prosecutions Mauritius and a part time lecturer at the University of Mauritius. He holds an LLM in Human Rights and Democratisation of Africa from the University of Pretoria and an LLM in.Banking and Finance Law (with distinction) from Queen Mary University of London.
[1] David Hou and David Skeie, ‘LIBOR: Origins, Economics, Crisis, Scandal, and Reform’(Federal Reserve Bank of New York Staff Reports 2014) vol. 667, 1 < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2423387 > accessed 27 June 2016
[2] ICE LIBOR, ‘ICE LIBOR Roadmap’ (18 March 2016 1, 4)
< https://www.theice.com/publicdocs/ICE_LIBOR_Roadmap0316.pdf> accessed 19 June 2016; The expansion of new financial instruments in the 1980s required “standardised interest rate benchmarks” which led to the British Bankers’ Association to administer and publish what was called the BBA LIBOR from January 1986 to January 2014 (ICE LIBOR (n 2) 4).
[3] Hou and Skeie ( n 1) 2
[4] Ibid
[5]ICE LIBOR (n 2) 4
[6] Ibid
[7] Philip Ashton & Brett Christophers, ‘On arbitration, arbitrage and arbitrariness in financial markets and their governance: unpacking LIBOR and the LIBOR scandal’ (2015) 44(2) Economy and Society, 188, 189
[8] Martin Wheatley, ‘The Wheatley Review of LIBOR: final report’ (HM Treasury September 2012 para 1.18)
<https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_ finalreport_280912.pdf >accessed 13 June 2016 (The Wheatley Report)
[9] Gregg Fields, ‘Common cause: institutional corruption’s role in the Libor and the 4pm fix scandals’ (2014) 8(1)Law and Financial Markets Review 8, 11
[10] Submissions of the ICE LIBOR are made by a panel of 11 – 18 contributor banks daily and the rates are calculated “using a trimmed arithmetic mean” where submissions are ranked in descending order and “then the highest and lowest 25% of submissions are excluded for outliers before the mean is calculated.” ( ICE LIBOR (n 2) 4)
[11] The BBA LIBOR produced “150 rates per day using 10 currencies with 15 maturities” (Gabriela Pirana, ‘The Wheatley Report on Reforming LIBOR: A step in the right direction?’ (2014) 68 University of Miami Law Review 883, 886); whereas the ICE LIBOR, now “produce 35 rates per day using 5 currencies and 7 maturities ranging from overnight to 12 months.” (ICE Benchmark Administration, ‘Ice Libor’ < https://www.theice.com/iba/libor> accessed 18 June 2016)
[12] Fair and Effective Market Review Report (FEMR) (June 2015) < http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf> accessed 17 June 2016
