Prof Taylor: Euronext will restore Libor's credibility

11 July 2013

Mark Taylor

Warwick Business School Dean Mark Taylor believes appointing NYSE Euronext to take over the running of the interbank rate, Libor, will restore its reputation on the global stage.

Libor – the London interbank offer rate – is a measure of the average interest rate at which banks lend to each other in the London market and is measured daily at 11.30am. It is used as a benchmark for everything from car loans to mortgages and the value of investments like bonds and derivatives. It is estimated that the total value of financial products linked to Libor is around $350 trillion (£235 trillion).

Confidence in Libor as a true measure of the market rate was badly hit when Barclays, UBS and RBS were fined a total of $2.6 billion (£1.75 billion) for manipulating the rate. An independent panel chose NYSE Euronext, who run the New York Stock Exchange, after a report by the Financial Conduct Authority (FCA) into the Libor scandal recommended a new body take over running it from the British Bankers Association (BBA).

Professor Taylor, a former Managing Director of investment giant BlackRock, said: “Having such a respected player as NYSE Euronext take over the running of Libor gives it a layer of independence and restores its credibility among investors, showing that it will be ‘squeaky clean’ from now on. Using a US firm emphasises the international nature of the City and its importance on the global financial stage.

“Much of the heavy criticism of the running of Libor came from the US so employing Euronext will defuse that.”

NYSE Euronext will start running Libor in early 2014 through its new subsidiary NYSE Euronext Rate Administration Limited, which will be based in the UK, and it will be regulated by the FCA.

At the moment Libor is calculated by Thomson Reuters for the BBA, who have overseen it since the 1980s, based on estimates received from 16 major international banks in London of how much they must pay in order to borrow cash from other banks.

Professor Taylor says once the new system is up and running NYSE Euronext are planning to include a wider and more representative sample of banks and their estimate will be based on actual transactions taking place that day to calculate the average rate. It is also expected that all submissions from individual banks will be published three months later.

“These three things will make it a lot more transparent,” said Professor Taylor. “It will create a paper trail that will make it harder to manipulate the rate. What it means is that they will get as close as possible to saying what the true market rate is.

“Going forward, bringing in NYSE Euronext is great news for the Libor and the City’s reputation. Really, how the Libor was run before was quite old fashioned, Euronext and the FCA recommendations on the setting of Libor will bring a new level of professionalism to the process. In the future I imagine it will all be done automatically through an IT system.”

NYSE Euronext says UK-based Rate Validation Services will provide software and service support for the running of Libor.

“To have Libor regulated properly and overseen by an independent body is very important for the City and investors all over the world,” said Professor Taylor, who has been special economic adviser to two cabinet members of the UK Government and to the International Monetary Fund, the World Bank and the Bank of England.

“It is used as a benchmark by investors all over the world and this is a big step in its rehabilitation as a trusted source.”

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