LIBOR – the future

I just updated the LIBOR timeline with what's happening this year when five currencies are discontinued from LIBOR publications.

In case you missed it, here's what's happening.

At the end of the LIBOR timeline, the British Bankers’ Association (BBA) alerted me to their response and recommendations in light of the Wheatley review.

The Wheatley review made ten recommendations for LIBOR reform:

1. The new Financial Conduct Authority should regulate the
submission to, and administration of, LIBOR – and there should be criminal
sanctions for any attempted manipulation.

2. The British Bankers’ Association should make an orderly
transfer of responsibility for LIBOR to a new administrator, selected by an independent
committee.

3. The new administrator should scrutinise submissions and
regularly review the effectiveness of LIBOR.

4. There should be a new code of conduct for submitters,
approved by the Financial Conduct Authority.

5. LIBOR should, as far as possible, be corroborated by
transaction data in line with the guidelines in the Review.

6. To improve this ability to corroborate submissions, the
number of currencies and maturities for which submissions are made should be
cut substantially to achieve a sharper focus on the more heavily used benchmarks.

7. Submissions should be published, but after 3 months to
avoid the incentive for banks to try to flatter their perceived credit standing
and reduce the opportunity for collusion.

8. The Government should provide the Financial Services
Authority with a reserve power to compel banks to submit to LIBOR.

9. All market participants should consider whether LIBOR is
the most appropriate rate for their needs and to ensure that their contracts
have workable contingency provisions.

10. The UK, European and International Authorities should
establish clear principles for global benchmarks.

And the British Banker's Association (BBA) responded to item #6 specifically, with recommendations for change in November 2012.

These recommendations mean that half of the currencies currently covered by LIBOR
will be discontinued.

The Association of Corporate Treasurers (ACT) issued a response to this to enable corporate treasurers to find alternative ways to
deal with these currencies. Here’s a summary of their advice.

Background

The Wheatley Review of LIBOR concluded that “given the low
usage of many of the currencies and tenors for which LIBOR is published, the
Wheatley Review has concluded that a carefully managed and phased reduction in
the number of LIBOR benchmarks published could occur without significant market
disruption.” 

As a result, Wheatley
recommended the publication of LIBORs for the Australian Dollars (AUD),
Canadian Dollars (CAD), Danish Krone (DKK), New Zealand Dollars (NZD) and
Swedish Krona (SEK) be discontinued.

The BBA’s Statement published in December 2012 has agreed these
recommendations with an agreement to withdraw LIBOR for NZD at end February,
DKK and SEK at end March and AUD and CAD at end May 2013.

This briefing note sets out some alternatives to LIBOR for
the withdrawn currencies. 

Australian Dollar

The bank bill interest rate is treated as the wholesale interbank
rate within Australia, and is published by the Australian Financial Markets
Association (AFMA).  It is the borrowing
rate among Australia’s top market makers.

The reference rate is typically referred to as the “bank
bill rate” although the actual term is the “bank bill swap interest rate” hence
the abbreviation BBSW.

BBSW rates are made public on a 24 hours delay basis from
AFMA’s website http://www.afma.com.au/data/bbsw,
and live rates are available for a paid subscription or on vendor pages such as
Bloomberg and Reuters.

Canadian Dollar

The Canadian Dollar Offered Rate (CDOR) is the recognised
benchmark index for bankers’ acceptances with maturities up to one year.  It is calculated and published daily at 10:15
by Thomson Reuters on the CDOR page of Reuters’ Monitor Service.  CDOR is used as a reference rate in setting
the floating interest rate in commercial agreements and as the settlement price
for a number of derivatives including futures contracts and swaps. It is worth
noting that the sponsor of CDOR, the Investment Industry Regulatory
Organization of Canada (IIROC), is currently performing a review of how the
rate is set.

Danish Krone

The Copenhagen Interbank Offered Rate (CIBOR) is compiled
and published by NASDAQ OMX at approximately 11am daily.  It represents the average interest rate at
which term deposits are offered between prime banks in the Danish wholesale
money market or interbank market.

The Danish Bankers Association has the overall
responsibility for CIBOR publishes rules governing CIBOR rate fixings. These
can be found at (in Danish) http://www.finansraadet.dk/tal--fakta/satser/regler-for-fastlaeggelse-af-cibor.aspx
.  However, following the LIBOR scandal,
the Danish government is passing legislation to move supervision of
rate-setting to the Danish Financial Supervisory Authority http://www.finanstilsynet.dk/en.aspx
.

New Zealand Dollar

The New Zealand Financial Markets Association (NZFMA) manages,
calculates and distributes New Zealand official market reference rates and
pricing services, including the NZ Bank Bill Reference Rate (BKBM).

NZ BKBMs are downloaded to the NZFMA website at
approximately 4 pm New Zealand Time (NZT) each day, and may be found at the
website http://www.nzfma.org/system/bkbm/default.aspx
 . 
Live rates are available on a paid subscription basis. NZFMA Bank Bill
rates are also published and available on Thomson Reuters: page code BKBM and
Bloomberg: page code NZFM1<GO> through the NZdata service.

Swedish Krona

The Stockholm Interbank Offered Rate (STIBOR) is compiled
and published by NASDAQ OMX Stockholm at 11.05am daily.  STIBOR is an arithmetic average of the rates
quoted by five banks on the STIBOR panel. These banks are: Danske bank, Handelsbanken,
Nordea, SEB and Swedbank.  STIBOR is
based on the offered rates that each bank in the panel can offer to the other
banks in the panel for unsecured loans in SEK. If the lowest and/or highest bid
differs with 25 basis points or more from the second lowest and second highest
bid it will be excluded from the calculation. STIBOR is then calculated as an
average of these rates.

The STIBOR rate sponsor is Riksbank. Riksbank performed a
review of STIBOR in November 2012 outlining the need for a number of
reforms.  A copy of the report can be
found at: http://www.riksbank.se/Documents/Rapporter/Riksbanksstudie/2012/rap_riksbanksst
udie_stibor_121128_eng.pdf .

If this is of interest to you, checkout the original ACT advisory note, and thanks to Brian Mairs and  John Grout for pointing out the BBA and ACT responses.