A financial crisis followed by a rate-rigging scandal can really take the life out of a market. (And some of its usefulness as an indicator, too.)At one point, the benchmark rate for unsecured short-term loans between banks — known as the London Interbank Offering Rate, or Libor — was basically made up, as the now-infamous Tom Hayes tried to manipulate it in ways that would make his desk’s trades more profitable.And now, well… it’s still kind of made up! Just not in any way that seems particularly exciting or prosecution-worthy. Instead, it’s based on market data that could be “stale,” says Deutsche Bank in a note this week. With our emphasis:…only around one-third of USD Libor submissions at the 3M tenor are based on actual transactions, and the figures for the 6M and 1Y tenors are even lower. Instead, the bulk of submissions that go into factoring term Libor are based on derived data that could be potentially stale (up to 3 days old at the 3M tenor and 5 days at the 6M tenor), as well as data observed in related but not directly comparable markets such as FX swaps and repo. In these non-transaction-based submissions, the IBA relies on the expert judgment of individual contributors.ICE Libor — as it’s been called since the Intercontinental Exchange bought the benchmark — reports how many of its submissions are based on actual transactions.
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A financial crisis followed by a rate-rigging scandal can really take the life out of a...