Diagnosing the LIBOR: Strategic Manipulation and Member Portfolio Positions (Abstract of Report)

3/10/2006 Barclays (source: FSA.gov.uk, 6/27/2012)
Here's an interesting read on LIBOR manipulation from 2009 given the current LIBOR and Euribor scandal at Barclays, and soon to be other banks. The report has some nice charts in it (tweeted by @carney). To your right are snapshots of emails from Barclays' interest rate derivative traders to their LIBOR submitter on March 10, 2006 (via the Financial Services Authority).

Diagnosing the LIBOR: Strategic Manipulation and Member Portfolio Positions

Connan Snider

Thomas Youley
University of Minnesota

February 7, 2009
Preliminary and Incomplete


The London Interbank Offered Rate (Libor) is a vital benchmark interest rate to which hundreds of trillions of dollars of financial contracts are tied. We provide new evidence that panel banks may have misreported actual borrowing costs when quoting rates to the Libor survey. This evidence stems from discontinuities involved in the Libor's construction. We introduce a simple model where banks' possession of Libor indexed contracts leads them to quote rates that are clustered at discontinuities and show that such clustering has been severe in the 3-Month U.S. Libor throughout 2009. We then present suggestive evidence that several banks have large exposures to the Libor through their interest rate derivative portfolios and have recently profited from the rapid descent of the Libor.

Continue reading here or here. And read this by the authors: Does the LIBOR reflect banks' borrowing costs? (April 2, 2010).
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