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Financial Risk Analysis
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Libor Scandal Barclays
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Abrar Ahmed
Introduction
The London Interbank Offered Rate (LIBOR) is a leading financial
benchmark, established in 1986, and used for an estimated $300 trillion
worth of financial instruments. On June 27, 2012, Barclays Bank (Barclays)
entered into a $360 million settlement with the United States Department of
Justice (DOJ) and the Commodity Futures Trading Commission (CFTC)
after Barclays attempted to manipulate LIBOR between 2005 and 2009.
Further, the United Kingdoms (UK) Financial Services Authority (FSA)
fined Barclays $92.5 million for its attempted LIBOR manipulation. Authorities
have since expanded the investigation to include at least fifteen other banks.
On July 2, 2012, the UK Treasury appointed Martin Wheatley (Wheatley),
the managing director of the FSA, to review LIBOR and evaluate options for
reform. On September 28, 2012, Wheatley released his findings in The
Wheatley Review (the Review) and determined that, although broken,
LIBOR can be reformed.
Libor is a benchmark interest rate based on the rates at which banks lend
unsecured funds to each other on the London interbank market, and is
published daily by the British Bankers' Association (BBA). LIBOR represents
the lowest real-world cost of unsecured funding in the London market.
Financial institutions use LIBOR for various financial instruments including
swaps, futures, options, student loans, mortgages, and credit cards.
The scandal
The Barclays investigation revealed two types of LIBOR manipulation.
The first involved requests to manipulate rates for the benefit of derivatives
traders. The second involved submitting false rates during the financial
crisis to protect Barclayss reputation.
reliability of LIBOR and presenting his suggestions for improving the ratesetting process.
involved in setting the key rate in finance need to get moving. Adding a calendar note to Fix
LIBOR just won't do.