Presented By:

Names
Bhavesh Bajaj Ashish Jaisinghani Mohit Jain Geet Mehta Praveen Motwani Suraj Mundra

Roll No. 03 15 26 28 30 31

Contents
Sr. No

Table of

Particulars

1.

Overview Of Libor

2.

Scam

3.

Impacts

4.

Case Study : Barclays

5.

RBS & UBS

6.

Reforms

7.

Webliography & Bibliography

LIBOR
The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is the primary benchmark, along with the Euribor, for short term interest rates around the world. Libor rates are calculated for ten currencies and fifteen borrowing periods ranging from overnight to one year and are published daily at 11:45 am (London time) by Thomson Reuters. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor. Libor is defined as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.45am London time. The British Bankers' Association publishes a basic guide to the BBA Libor which contains a great deal of detail as to its history and its current calculation. Member banks are international in scope, with more than sixty nations represented among its 223 members and 37 associated professional firms as of 2008. Eighteen banks for example currently contribute to the fixing of US Dollar Libor. The panel contains the following member banks:

Bank of America Bank of TokyoMitsubishi UFJ Barclays Bank BNP Paribas Citibank NA Credit Agricole CIB

Credit Suisse Deutsche Bank HSBC JP Morgan Chase Lloyds Bank Rabobank

Royal Bank of Canada Socit Gnrale Sumitomo Mitsui Bank Norinchukin Bank Royal Bank of Scotland UBS AG

Scope The Libor is widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard interbank products, commercial field products, and hybrid products which often use the Libor as their reference rate. Standard interbank products:

Forward rate agreements Interest rate futures, e.g. Eurodollar futures Interest rate swaps Hybrid products:

Commercial field products:

Floating rate notes Floating rate certificates of deposits Syndicated loans Variable rate mortgages Term loans

Range accrual notes Hybrid perpetual notes Collateralized mortgage obligations Collateralized debt obligations

In the United States in 2008, around 60 percent of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the US dollar Libor. In 2012, around 45 percent of prime adjustable rate mortgages and more than 80 percent of subprime mortgages were indexed to the Libor. American municipalities also borrowed around 75 percent of their money through financial products that were linked to the Libor. In the UK, the three-month British pound Libor is used for some mortgages especially for those with adverse credit history. The Swiss franc Libor is also used by the Swiss National Bank as their reference rate for monetary policy The usual reference rate for euro denominated interest rate products, however, is the Euribor compiled by the European Banking Federation from a larger bank panel.. The Libor is an estimate and is not intended in the binding contracts of a company. It is, however, specifically mentioned as a reference rate in the market standard International Swaps and Derivatives Association documentation, which are used by parties wishing to transact in over-the-counter interest rate derivatives.

Technical features Calculation Libor is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA). It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am? The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10, yielding a 23% trimmed mean. The average is reported at 11:45 a.m. Currency In 1986, the Libor initially fixed rates for three currencies. These were the U.S. dollar, British pound sterling and Japanese yen. In the years following its introduction there were sixteen currencies. After a number of these currencies in 2000 merged into the euro there remained ten currencies: Australian dollar (AUD) Canadian dollar (CAD) Swiss franc (CHF) Danish krone (DKK) Euro (EUR) British pound sterling (GBP) Japanese yen (JPY) New Zealand dollar (NZD) Swedish krona (SEK) U.S. dollar (USD)

Maturities Until 1998, the shortest duration rate was one month, after which the rate for one week was added. In 2001, rates for a day and two weeks were introduced: 1 day 3 months 8 months 1 week 4 months 9 months 2 weeks 5 months 10 months 1 month 6 months 11 months

2 months

7 months

12 months

The Libor Scandal

As if the credit crisis and rogue traders were not enough to undermine the reputation of the financial services industry, along comes an issue that may dwarf them: the rigging of the London Interbank Offered Rate, or Libor, by a number of global banks. Libor is arguably the most widelyused interest rate in the world. Manipulating this rate by even small percentages can result in extremely wide-ranging consequences. Many banks need to borrow cash on a daily basis to strengthen their balance sheets while other banks with excess cash wish to earn interest by lending out money. Libor is important for a number of reasons. Nearly every rate used in financial calculations has its basis in the Capital Allocation Pricing Model. The model essentially states that whatever interest rate required for any risky venture will necessitate a compensation rate above a riskfree rate. In other words, the riskier a security, portfolio, or an investment in general, the higher the spread above risk-free rate an investor will demand. Most governments, banks, and investors believe Libor to be an appropriate measure of the risk-free rate, resulting in the use of Libor to calculate a range of other rates, from mortgages to car loans. It is estimated that Libor is tied to financial products whose values total to around $800 trillion. In addition to being a benchmark for calculating other rates, Libor is also used as a gauge for the overall health of the banking industry. When a bank is charged a higher rate, other banks believe it to be riskier. Such an event occurred during the recent 2008 financial crisis, when Libor rates were at abnormally high levels. However, the Libor rates did not remain high, and in fact fell to pre-crisis levels within a few months. Cracks within the Libor system were beginning to show. Historically, the Libor rate has been difficult to manipulate, as deviations from the norm would be apparent. Yet many problems with the Libor calculation process existed and were known for quite some time. Libor has always been based on a self-reporting system. Rate submitters within each bank on the Libor panel would submit the rate they were being charged to borrow capital. Due to little to no regulation, banks could submit rates that benefited them the most.

When the Libor rate is manipulated downwards, the prices of bonds on the banks balance sheet rise. In addition, any loans on the balance sheet whose interest rates are tied to Libor will now be repaid in the future at a lower rate. Internal emails uncovered from a Barclays trader revealed that even a basis point (.01%) drop in the Libor rate could create a few million dollars in gains for his positions. Other banks with similar balance sheet would also benefit. In addition, any borrower, whether it is a student getting a loan for college or a family getting a mortgage to buy a house, would also benefit from a lower Libor rate. Nearly all financial transactions involve a zero-sum game; when one party reaps a gain, another party must suffer a loss of equal magnitude. When Libor rates were manipulated downwards, lenders of cash received a lower interest rate than they should have. These lenders could include any person with a savings account, an institutional lender, or large pension funds and municipalities, all of whom lost millions. The scope of this Libor rigging scandal is larger than any previous financial scandal in history, even larger than the Madoff Ponzi Scheme and the Enron Scandal. Essentially any person or company lending or borrowing money is affected. Those investing in equities are also indirectly affected, as the spread between their returns and the risk-free rate is reduced if Libor is rigged upwards, leading to a lower absolute return. Even without government intervention, Libor failed to be a perfectly competitive rate. Many are asking how one bank could single-handily manipulate Libor to benefit its own balance sheet. The short answer is that one bank most likely cannot. It is alleged that other banks were involved as well. Instead of being a perfectly competitive rate, Libor became an oligopolistic or cartel-like rate, benefiting only those involved in the rigging process.

Impact Of Libor
Libor is tied to trillions of dollars in swap agreements and other derivativeswhich can affect investorsas well as loans to individuals and businesses. The most-affected products include private student loans, adjustable-rate mortgages, money-market funds and bank-loan funds. Some business loans and credit cards also are tied to Libor The reach of LIBOR is enormous, affecting a broad range of markets and constituents, directly and indirectly. As such, quantifying the financial impact of potential LIBOR manipulation is a challenging and daunting task. As regulators and lawmakers in U.S. and Europe assess the depth of Libor abuse and failure to address it, one thing is certain that it has surpassed the likes of Enron and other scandals to be one of the biggest scandals to hit the world. Following the Barclays settlement, numerous lawsuits have been filed against some of the worlds largest banks in connection with their alleged manipulation of LIBOR. Many of these cases are class action suits brought on behalf of a diverse group of plaintiffs including investment managers, lending institutions, derivatives users, brokerage firms and municipalities. Besides alleging that LIBOR-submitting banks artificially suppressed the published LIBOR indications and caused plaintiffs to earn a lower rate of interest on investments, some plaintiffs have also claimed that the banks conspired to suppress Libor. Governments, mutual funds, pension funds, Investors may face many hurdles in proving the damages, lawsuits will not be easy to win because investors will have to first prove that the banks successfully pushed down Libor for an extended period during the crisis , and then demonstrate that it was down on the day when the bank calculated particular payments. In addition investors will have to prove that a specific bank from which they were receiving payments was involved in manipulation. However if they are successful in proving the charges, the lawsuits could lead to bank paying tens of billions of dollars apart from fines and penalties levied by regulators.

Impact on investors Libor is used to determine lending rates for trillions of dollars of credit, from loans between financial institutions to credit cards and adjustablerate mortgages. Banks are accused of not only lowering rates during the financial crisis but also rigging the rates upwards to make profits on their positions as well as the request of some derivative traders. The question arises if bank manipulated the LIBOR by rigging the rate downwards isnt it beneficial to people because people will have to pay a lower rate of interest on their loans, borrowings. It may not be so, because it depends which way you are looking. If you think from the borrowers perspective it is beneficial to them because they will have to pay a lower interest if LIBOR is rigged downwards and vice-versa. However, if you think from the lenders or the depositors perspective you potentially lose out on that extra interest if the LIBOR is manipulated downwards. Moreover, if you have an adjustable-rate mortgage or an auto loan that's tied to LIBOR, the interest charged to you could have been tweaked upward then you end up paying more than what you should have actually paid. Of the mortgages in the United States that are adjustable-rate, about 45 percent of prime mortgages and 80 percent of subprime have interest rates based on the Libor. About half of variable-rate private student loans are tied to the Libor. Homeowners in the US filed a class action lawsuit in October 2012 against twelve of the largest banks which alleged that Libor manipulation made mortgage repayments more expensive than they should have been. Statistical analysis indicated that the Libor rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset". During the analysed period, the Libor rate rose on average more than two basis points above the average on the first day of the month, and between 2007 and 2009, the Libor rate rose on average more than seven and one-half basis points above the average on the first day of the month. But the sheer vastness of the derivatives market makes this a potentially huge headache for the banks. There's a general estimate floating around that Libor affects about $800 trillion in notional derivatives -- that's

"trillion," not "billion" or "million." Banks are not going to be on the hook for anything near that much, as the bulk of this amount is "notional" -- meaning, roughly, "not real." What is far more likely is that people with derivatives contracts tied to Libor lost tiny percentages of that $800 trillion with some regularity because of Libor manipulation. Anyone that has investments whether its a simple savings account, certificates of deposit or investments in variable rate products may have received much lower returns when LIBOR was manipulated downward. Basically, you were negatively affected by the LIBOR rate rigging if you have any type of investment that was tied to LIBOR. Impact on American municipalities The city of Philadelphia became the latest municipality to join hands with other U.S local governments such as Houston, Baltimore and the California counties of San Diego and Sacramento, to sue some of the world's biggest banks for financial losses incurred in the Libor interestrate rigging scandal. They claim that the banks' behavior "was nothing short of naked pricefixing." The governments say that rate swap agreements that cities use to hedge borrowing costs were manipulated by the financial institutions to their own advantage. The parent banks named in the Philadelphia complaint are Bank of America Corp, Barclays Bank Plc, Citi group, Credit Suisse Group AG, Deutsche Bank AG, JP Morgan Chase, Royal Bank of Canada, RBS and UBS AG. The U.S. municipalities claim that they lost money when they received lower interest rate payments than they should have, or had to pay artificially inflated rates because of the alleged manipulation. Philadelphia also said local governments were forced to pay "sometimes devastating" penalties to terminate investment agreements.

Between 2009 and 2011, the city paid nearly $110 million altogether in termination fees to various banks to unwind swap agreements built around interest rates, including the Libor, according to its complaint. The complex swaps "have cost state and local governmental entities hundreds of millions or even billions of dollars, depleting treasuries, ruining budgets, and hindering the delivery of public services," Philadelphia said in its lawsuit. Instead of using the usual 30-year-fixed-rate bonds, the banks convinced many municipalities to sell variable rate bonds at lower rates, and then buy a swap that would fix the total payment to a lower rate than what they had paid in the fixed-rate market. It was designed to be a win-win situation: The government agency could borrow money at a slightly lower rate while the investment bank earned millions of dollars in fees. However, there was a problem with the formula one that would cause municipalities to lose billions of dollars. Changes in the variable rate on bonds were always tied to an index of actual municipal bond transactions compiled by the U.S.-based Securities Industry and Financial Markets Association (SIFMA). Yet the swaps were tied to the London Interbank Offer Rate (LIBOR), which is set by the London Bankers Association. If LIBOR moved lower at a faster pace than SIFMA, the government agencies hedge would come up short. Since many of the largest banks were in fact manipulating LIBOR at a rapid rate, the cities lost tens of millions of dollars. Impact on pension funds Pension funds and other entities invest in a wide variety of investment options that are based on LIBOR. The manipulation of LIBOR drastically can affect the return on investment received from a pension plan or investment fund. Unfortunately, many times the investment funds do not realize they have been damaged because of LIBOR manipulation. This is exactly what the banks that manipulated LIBOR counted on. Many of the intuitions never knew they were harmed until it became public knowledge that LIBOR had been manipulated AND, even then, they had to investigate whether they actually had been harmed. The real impact for pension funds will depend on their asset mix and derivatives positions at the time when the misconduct took place. "Assuming that any manipulation did artificially lower LIBOR, then the implications for pension funds might be found on LIBOR obligations for the interest rate swaps or total return swaps they entered into," he said.

"In that case, a pension scheme could potentially be impacted in the sense that it would have paid less than it should have done. "However, there might have been a knock-on impact to the long positions under these derivatives. In other words, the fixed rate locked-in could have been lower too." However, some pension funds using asset-swapped gilts might have been worse off as a result of the LIBOR rate being artificially lowered. "Over the past three years, pension schemes have started using assetswapped gilts to get LIBOR plus margin. "Under that model, a pension fund would receive LIBOR plus margin and pay gilt returns back to a bank. "As a result, if the LIBOR rate was lower than it should have been, pension funds potentially would have been impacted negatively as they received a lower LIBOR rate." The impact of LIBOR manipulation on pension funds is hard to pin down and could have happened through a range of financial instruments. Impact on mutual funds/hedge funds Some mutual-fund investors are likely to have been hit by the Libor scandal. A variety of funds invest in securities and other financial instruments with returns tied to Libor. Investors could have been receiving a lower yield than they should have if banks were rigging the rate lower. Money-market funds, with assets of about $2.6 trillion in the U.S., invest in short-term-debt instruments with returns that are sometimes tied to Libor. Brokerage firm Schwab alleged in a lawsuit filed that it had purchased billions of dollars in Libor- based instruments that were paying artificially low returns because the banks decided to depress the rate. In its complaint Schwab alleged that they concealed their conduct even after questions were raised beginning in 2007 about potential Libor manipulation. The lawsuit includes claims of fraud, unjust enrichment, violation of California unfair business practices and federal securities laws and seeks to rescind purchases of Libor-based instruments.

1.ROYAL BANK OF SCOTLAND The Royal Bank of Scotland (RBS) Group is an international banking and financial services company. From its headquarters in Edinburgh, the RBS Group operates in the United Kingdom, Europe, the Middle East, the Americas and Asia, serving over 30 million customers worldwide. The RBS Group provides a wide range of products and services to personal, commercial, large corporate and institutional customers through its two principal subsidiaries, 2.ROYAL BANKS ROLE IN LIBOR SCAM At RBS, traders in multiple offices around the world were involved, including London, Singapore and Tokyo. They focused on the manipulation of yen and Swiss franc Libor rates, using instant messaging systems to communicate with other traders. According to the US Commodity Futures Trading Commission (CFTC), which hit RBS with a 208m fine, RBS made hundreds of attempts to manipulate the rates and succeeded on a number of occasions. It said Libor rate-fixing continued at RBS, even after traders learned that regulators had opened investigations into the bank. RBS's Japanese subsidiary has pleaded guilty to one count of wire fraud relating to the manipulation as part of the settlement with US regulators. 3.PENALTIES AND EFFECT ON RBS Royal Bank of Scotland (RBS) has been fined 390m ($610m) by UK and US authorities for its part in the Libor rate-fixing scandal. The UK's Financial Services Authority issued a fine of 87.5m, while about 300m will be paid to US regulators and the US Department of Justice. The fines are 100m greater than those issued to banking rival Barclays last year for similar offences. RBS said all but six of the 21 staff implicated had either been fired or had already left the bank. The remainder were being disciplined RBS will cut 300 million pounds from its bonus pool, including clawing back awards from previous years, to pay the U.S. fines. The UK penalty

will be donated to charitable causes, including supporting soldiers and their families, the government said. 1.UNION BANK OF SWITZERLAND UBS AG is a Swiss global financial services company headquartered in Basel and Zrich, Switzerland. It provides investment banking, asset management, and wealth management services for private, corporate, and institutional clients worldwide, as well as retail clients in Switzerland. The name UBS was originally an abbreviation for the Union Bank of Switzerland, but it ceased to be a representational abbreviation after the bank's 1998 merger with Swiss Bank Corporation.[2] The company traces its origins to 1856, when the earliest of its predecessor banks was founded. 2.UBS ROLE IN LIBOR SCAM At least 45 individuals at the Swiss investment bank were part of a racket that manipulated the market in various locations around the world, including Japan, Switzerland, the UK and the USA, the Financial Services Authority (FSA) said. UBS began manipulating inter-bank borrowing, or Libor, in early 2005 with traders making false submissions to the organisations that compiled banks offers to set the daily rate. By 2007, though, UBSs rigging was industrial in scale with illicit fees paid to brokers that ran into hundreds of thousands of pounds and deals struck with rivals so that everyone would have the chance to cash in. The scale of the abuse was on a radically different level from that at Barclays, which is why UBSs 940m fine was more than three times bigger 3.PENALTIES AND EFFECT ON UBS Swiss bank UBS will pay $1.5 billion in penalties after admitting to fraud in its role in manipulating global benchmark interest rates. The settlement follows a far-reaching investigation by regulators and law enforcement officials around the world into the setting of the London Interbank Offered Rate, or Libor, and related interbank rates.

UBS said the payment would settle claims with U.S., U.K. and Swiss authorities. The bank has agreed to a non-prosecution deal with the U.S. Department of Justice covering all its subsidiaries except UBS Securities Japan, which pleaded guilty to one count of wire fraud. The investigation revealed extensive misconduct over a period of six years by at least 45 UBS staff, including senior managers, who sought to influence rates to benefit the bank's trading positions and make it look stronger during the financial crisis. UBS was found to have colluded with other banks and brokers, making corrupt payments to brokers worth 15,000 per quarter over a period of 18 months.

Reforms
Recommendations of Wheatley Report. While it remains unclear exactly what is needed to reform LIBOR and restore trust in the benchmark, Wheatley released the Review, on September 28, 2012, outlining his recommendations. The review provides a ten-point plan for reform including regulations, reform of the submission process, new guidelines for contributing banks, and immediate changes to LIBOR. Ultimately, the Review concluded LIBOR should be reformed, not replaced. Actual Market Data. Require that actual market data be more clearly used to determine LIBOR submissions.Banks should submit the actual data and should not manipulate the rates. Introduce code of conduct for LIBOR setters. There should be proper code of conduct or set of rules and regulations for setting the rates of LIBOR. Appoint independent administrators in place of BBA There should be a proper administration of LIBOR rates For eg: NYSE Euronext has taken the administration of LIBOR which would be affected from the year 2014. Designate LIBOR setting as a regulated activity/ benchmark manipulation as criminal offence. If any bank is manipulating the LIBOR rates it should be treated as criminal offence as investors money gets affect with the manipulation of rates. Domestic Regulators of LIBOR Basically there are 3 domestic regulators of LIBOR i.e SEC( Securities Exchange Commission), CFTC(Commodity Futures Trading Commission) and the state attorney generals. The AGs of New York and Connecticut have already sent subpoenas to 16 banks in a joint

investigation including Barclays, Bank of America, JPMorgan, HSBC, UBS, Citigroup, Deutsche Bank, and RBS among others. DOJ is the Criminal Investigation department of LIBOR and foreign regulators like Canadian, Swiss, and Japanese regulators have begun investigations. Barclays has already paid: $200 million to the CFTC $160 million to the DOJ 59.5 million to the Financial Services Authority More fines will almost certainly result from continuing investigations NYSE EuroNext to Take Over Administration of Libor The administration of a distinctly British institution is being handed over to an American company. The parent company of the New York Stock Exchange won a contract on Tuesday to administer and improve the benchmark interest rate known as Libor, long run by the British Bankers Association. Under the new contract, Libor will keep its name and will remain under the oversight of British regulators. NYSE Euronext is setting up a new subsidiary in London that will run the process. NYSE Euronext is set to take over the administration of Libor early next year. A new subsidiary, NYSE Euronext Rate Administration Ltd., will be able to leverage NYSE Euronexts trusted brand, long regulatory experience and market-leading technical ability to return confidence to the administration of Libor, according to a statement from the company.

Webliography & Bibliography

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