TAILIEUCHUNG - LIBOR Manipulation: A Brief Overview of the Debate

Changes in the official rate also affect the market value of securities, such as bonds and equities. The price of bonds is inversely related to the long-term interest rate, so a rise in long-term interest rates lowers bond prices, and vice versa for a fall in long rates. If other things are equal (especially inflation expectations), higher interest rates also lower other securities prices, such as equities. This is because expected future returns are discounted by a larger factor, so the present value of any given future income stream falls. Other things may not be equal—for example, policy changes may have indirect effects on expectations or. | LIBOR Manipulation A Brief Overview of the Debate David M. Ellis PhD Managing Director Economics 44 0 20 7979 7472 FTI UK HOLDINGS LIMITED 322 HIGH HOLBORN LONDON WC1V 7PB LIBOR Manipulation A Brief Overview of the Debate 1 Introduction There have been numerous articles in the press recently discussing the investigations that are being mounted by the SEC and DOJ in America and the FSA in the . In order to understand the allegations one needs to know how the LIBOR fixing works and the banks role in it. Also it important to understand the nature of the studies and evidence that have led to the allegations of manipulation. LIBOR is a key central part of the global financial market system. Over 10 trillion in corporate loans floating rate notes adjustable rate residential mortgages etc. are pegged to LIBOR. Additionally LIBOR is the key rate in the 350 trillion market for interest rate swaps. Finally many other derivatives depend upon LIBOR in some manner or other. Therefore if LIBOR rates are being distorted or manipulated in any way the ramifications extend to nearly every corner of the global money markets and to participants in many sectors of the global economy other than banks and financial institutions. There has been no evidence to date of manipulation of LIBOR arising from such activities as illegal contacts between banks or breaches of Chinese walls etc. Rather the allegations have been based on empirical analysis sometimes of a very ad hoc nature either of the bids from which published LIBOR rates have been calculated or of a comparison of LIBOR with similar interest rate benchmarks. There have been numerous such studies that have been undertaken in the last three years. Several of them are summarised below. While some claim to have found evidence of manipulation by one or more banks their evidence is not conclusive and in some areas is in fact highly questionable. 2 The LIBOR Fixing Process LIBOR stands for London InterBank

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