The news that LIBOR has been rigged and that Barclays has settled with regulators, while not a total shocker, has certainly sent shockwaves throughout financial markets. For years, LIBOR has been viewed as a vital benchmark in many (but not all) quarters. Its moment may now be past. This week, jobs are being lost, contracts are being restructured and the markets are looking for alternatives. This article presents a roundup of important news resulting from the LIBOR scandal.
1) Marcus Agius, Chairman of Barclays PLC, has resigned. According to a statement released by Barclays, Mr. Agius is quoted as saying that “last week’s events – evidencing as they do unacceptable standards of behaviour within the bank – have dealt a devastating blow to Barclays reputation. As Chairman, I am the ultimate guardian of the bank’s reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside.”
The New York Times reports that “With the resignation of Mr. Agius, Barclays may be trying to deflect some of the attention away from [CEO Robert E. Diamond Jr.], who ran Barclays’ investment bank during a period when authorities found wrongdoing by traders. Mr. Diamond has come under scrutiny from British politicians, and some have called for him to step down.”
To be continued.
2) Reworking LIBOR means changing a healthy part of the asset management business. Funds Europe reported today that over 300 funds use LIBOR as a benchmark, including 200 UCITS funds. And there are a countless number of funds that have derivative contracts based on LIBOR in some way or another. Now that the benchmark has proven to be historically manipulated, that throws into question likely millions of benchmarks and contracts between asset managers, their clients and their trading counterparties. Probably there is nothing to be done about this at this point – the deals are done and money has already changed hand. However, if a “clean” historical LIBOR were ever to get published, that could retroactively change the fate of over 300 funds’ returns as well as the returns of thousands of investment pools as their correct returns vs. LIBOR get calculated. Lawyers will be busy for years on that one.
3) With faith in LIBOR shattered, the markets are looking for alternatives. Our Friday post talked about the use of OIS spreads.
An article in Financial News today talked about ICAP’s purchase of Plus Markets as being one way to launch a UK interest rate derivatives exchange. The article noted that one of the products that ICAP might want to list is the Repurchase Overnight Index Average Rate (RONIA) benchmark. The FN article is here.
According to a Reuters from June 2011, RONIA is published daily by “the Wholesale Market Brokers’ Association, whose overnight rate for unsecured cash transactions, SONIA (Sterling Overnight Index Average), is already widely used as the basis for hedging tools by market participants.” RONIA is based on executed transactions and ICAP is a big trader.
We expect the markets to have an interest in alternatives to LIBOR, and RONIA is likely a name to watch. We will be paying close attention to repo-linked derivatives, one of our favorite topics, in particular.