The Nature Of Interest Rate Benchmark Calculation Across The Globe Lends Itself To Manipulation; Government Bodies In The Us Are Fighting Against A Five-Year Statute Of Limitations Since Some Infractions Go Back To 2008

Thursday, September 20, 2012 07:20
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The Nature Of Interest Rate Benchmark Calculation Across The Globe Lends Itself To Manipulation; Government Bodies In The Us Are Fighting Against A Five-Year Statute Of Limitations Since Some Infractions Go Back To 2008

Tags: fraud | interest rates | regulation

US regulators investigating the Libor rate manipulation scandal are asking for more time to complete their investigation. Banks embroiled in the scandal are trying to use the extra time to their advantage in their efforts to exonerate themselves as they face multiple lawsuits seeking damages from rate-fixing.

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To prohibit banks from succeeding in that effort, the Justice Department sent out tolling agreements to prohibit the banks from using the statute of limitations to challenge enforcement action.
 
The Commodities Futures Trading Commission (CFTC) is leading the civil portion of the probe and it asked the banks for tolling agreements earlier in the year. It’s not clear how many of the banks have signed agreements sent out by either investigative body.
 
The statute of limitations on such investigations is five years. It is coming into play because many of the infractions discovered by the investigation go back as far as 2008 during the financial crisis.
 
Settlements from the case could result in billions of dollars in damages and some settlement talks are scheduled to be completed by the end of the year. Some other bank investigations could take several more years, however.
 
Meanwhile, a group of international securities regulators are pointing to the same lack of oversight that enabled the manipulation of the Libor rate as a source for manipulation in other benchmark rates.
 
The International Organization of Securities Commissions (IOSC) issued a discussion paper that noted fewer than half of the benchmark interest rates surveyed in the US, Asia, and Europe were based on actual transactions.
 
The group is committed to restoring faith in benchmarking activities on a global basis and scrutiny of global benchmarks has grown more intense since June, after Barclays agreed to pay $460 million in a settlement agreement for its role in the scandal.
 
The paper says that 80% of benchmarks are compiled either by associations or private entities. In calculating the Libor rate, subjective judgments about rates and prices were often utilized instead of objective data.
 
Even when actual transaction data are used, compiling entities still have discretion in producing actual rates or prices.
 
A Bloomberg poll said that 44% of global traders predict the Libor rate will be replaced within five years by a calculation that is under greater government control. As it is, the process of setting benchmark rates is considered an unregulated activity. This hampers the ability of regulatory bodies’ authority to take action against manipulatory practices.

 

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