NYSE Euronext to take charge of troubled Libor benchmark
The move could help provide a fresh start for Libor, or the London interbank offered rate, which is used to determine the cost of short-term loans around the world. The banks that help set the rate each day have been accused of conspiring to rig the rate for their own benefit before and during the financial crisis, leading to billions of dollars in fines and a few arrests.
The move is a symbolic blow to a British financial industry that has been rocked by scandals and forced to look to the outside for leadership. Last week, a Canadian, Mark Carney, took over leadership of the Bank of England. The London Stock Exchange was among the four companies that also bid for the Libor contract, said a person briefed on the process, who spoke on the condition of anonymity.
Regulators are taking a broader look at the integrity of the financial data the global financial system relies on. Libor has already been substantially changed, but some regulators in the US have said it is too flawed and should be replaced.
The job of fixing Libor will not be an easy one. The benchmark is supposed to represent the rate at which banks lend money to each other on an unsecured basis. This is difficult given banks have generally been unwilling to make unsecured loans to each other since the financial crisis.
Banks have said that their submissions for Libor are an estimate of what the rate would be if they did lend the money. But Gary Gensler, the chairman of the US Commodity Futures Trading Commission, has said financial institutions should move away from Libor - which he calls a "fiction" - and use benchmarks derived from some sort of transaction.
One of Mr Gensler's fellow CFTC commissioners, Bart Chilton, was critical of the decision to continue allowing Libor to be administered by a company in the financial industry. "We had a fox guarding the henhouse issue here, and we should learn from that," Mr Chilton said. "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."
Administering Libor is more a matter of prestige than a source of big revenue. NYSE Euronext is paying only a nominal £1 fee for the right to the contract, according to a person briefed on the deal.
A few weeks ago, European regulators approved NYSE Euronext's sale to the IntercontinentalExchange, or ICE, an operator of derivatives exchanges based in Atlanta. NYSE Euronext has been trying to diversify its business beyond its traditional stock exchanges as stock trading volumes and revenue have fallen steadily.
Finbarr Hutcheson, the chief executive of NYSE Liffe, a NYSE Euronext subsidiary in London, said in a statement that his group was interested in "continuing the process of restoring credibility, trust and integrity in Libor as a key global benchmark".
Under the new contract, Libor will keep its name and will remain under the oversight of British regulators. NYSE Euronext is setting up a subsidiary in London that will run the process. NYSE Euronext is set to take over the administration early next year.
A new subsidiary, NYSE Euronext Rate Administration Ltd., "will be able to leverage NYSE Euronext's trusted brand, long regulatory experience and market-leading technical ability to return confidence to the administration of Libor", according to a statement from the company. Until now, the daily process through which Libor is set has been run by the British Bankers' Association, an industry group in London. A British government review of Libor led by Martin Wheatley, at the time the managing director of Britain's Financial Services Authority, recommended the responsibility for formulating Libor be given to an "independent party".
The deal will still need to be approved by the Financial Conduct Authority of Britain, now led by Mr Wheatley. The so-called Wheatley Review recommended Libor continue to be set through daily consultations with the world's largest banks. But while those banks now provide estimates of how much they are charging for short-term loans, in the future the administrators of Libor are also supposed to use data from actual short-term loans.
Frequently Asked Questions about this Article…
NYSE Euronext won the contract to administer and improve Libor (the London interbank offered rate), taking over day-to-day management from the British Bankers' Association. The company will run the process through a new London subsidiary and formally take over administration early next year, under the oversight of British regulators.
Libor is the London interbank offered rate used to set the cost of short-term loans around the world. Because many financial contracts and pricing reference this benchmark, changes to Libor’s administration or credibility can affect borrowing costs and the wider financial system that everyday investors rely on.
Libor’s administration was changed after investigations found that some banks had conspired to rig the rate, resulting in billions of dollars in fines and a few arrests. Regulators have been examining the integrity of key financial benchmarks and sought a fresh start for Libor following these scandals.
NYSE Euronext says it wants to restore credibility, trust and integrity to Libor and is setting up NYSE Euronext Rate Administration Ltd to run the process. However, the article notes real challenges remain — Libor has relied on banks’ estimates rather than many actual unsecured transactions, and some regulators argue benchmarks should be based on transaction data rather than estimates.
Yes. Some regulators criticized letting a firm within the financial industry administer Libor. CFTC commissioner Bart Chilton warned of a 'fox guarding the henhouse' and said a truly neutral third-party administrator might be preferable. The decision has drawn debate about potential conflicts of interest.
The Wheatley Review recommended shifting responsibility to an independent party and continuing daily consultations with major banks. It also suggested administrators should increasingly use data from actual short-term loans (transactions) rather than rely solely on banks’ estimates when formulating Libor.
No. Administering Libor is largely a matter of prestige rather than big revenue — NYSE Euronext is reportedly paying only a nominal £1 fee for the contract. The move appears aligned with the exchange’s broader efforts to diversify as trading volumes and revenues in traditional stock exchanges have declined.
Libor will remain under the oversight of British regulators. The deal still needs approval from Britain’s Financial Conduct Authority (FCA), led by Martin Wheatley at the time of the article, and NYSE Euronext will operate the benchmark through a UK-based subsidiary under that regulatory oversight.
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