Last updated: July 9, 2013 7:28 pm

Scandal-plagued Libor moves to NYSE

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A flag flies outside the door of the New York Stock Exchange in New York©Reuters

The Libor interbank rate formally broke with its scandal-plagued past on Tuesday as NYSE Euronext, the transatlantic exchanges operator, won the right to take over and reform the global benchmark, which serves as the reference point for more than $350tn in contracts worldwide.

The new administrators will be charged with restoring confidence in the interbank lending rate amid a global probe that has seen three banks pay nearly $2.6bn in fines for rigging the rate in order to make money on derivatives. The scandal has drawn nearly a dozen other banks and interdealer brokers and has tarnished the reputation of the City of London.

An independent committee, set up by the UK government, selected the New York-based group over two UK-based rivals. NYSE Euronext will take over the London interbank offered rate from the British Bankers’ Association by early 2014.

“This change will play a vital role in restoring the international credibility of Libor,” said Baroness Hogg, a leading City figure in recent decades, who chaired the committee.

The pricing benchmark

The pricing benchmark
How Libor works

NYSE Euronext will pay just $1, in part because the UK government was adamant the BBA should not profit from the scandal. The new administrator will take over the BBA’s existing contracts with users of the rate. UK officials have estimated that it will cost £1.6m to set up a properly regulated rate-setting process plus annual running costs of £1m a year.

The Libor rates will continue at least initially to be calculated by surveying a panel of banks about the rates at which they think they can borrow. But the new administrator is expected to consult with regulators and market participants to come up with ways to link Libor more closely to real transactions without upsetting the existing contracts.

“We expect NYSE Euronext to develop further the oversight and governance of Libor,” said Martin Wheatley, head of the Financial Conduct Authority, which was given power to regulate Libor in April. He has previously suggested the administrator might choose to run two sets of parallel rates, one based on estimates for the back book and one linked to transactions for new contracts.

NYSE Euronext, which owns the London derivatives exchange Liffe, beat the London Stock Exchange group to secure the contract and Thomson Reuters, the London-based financial data provider. Liffe already facilitates the trading of many derivatives contracts that are based on Libor and its European equivalent, Euribor.

“As part of a leading global exchange and market infrastructure group, NYSE Euronext Rate Administration Limited is uniquely placed to restore the international credibility of Libor,” it said in a statement.

Created in the 1980s by the BBA, Libor has been run by the industry group ever since. But the June 2012 admission by Barclays that its traders had sought to influence the rates, laid bare the conflict inherent in having the world’s biggest banks run and set the benchmarks on which their traders relied.

The decision to award the open-ended contract to NYSE Euronext comes only weeks before an impending change of ownership at the exchanges group. It is awaiting final approval from regulators for its $10bn cash-and-shares bid from IntercontinentalExchange, the US derivatives group.

Anthony Browne, BBA chief executive, said: “Restoring confidence in Libor has been an absolute priority for the BBA . . . We have been working hard with regulatory authorities and the government to put in place much-needed reforms to the system. The new administrator will take over a benchmark with better regulatory oversight and improved governance.”

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