The legal tussle continues over manipulation of the London Interbank Offered Rate (LIBOR). This time, financial bigwigs including Bank of America Corporation (BAC), Mitsubishi UFJ Financial Group Inc., Barclays PLC (BCS) and Citigroup Inc. (C) have filed a motion in the Manhattan federal court seeking release from claims of manipulating the LIBOR.
U.S. District Judge Naomi Reice Buchwald who is looking into the related antitrust cases against the banks and the British Bankers’ Association (BBA) has been asked by the banks to dismiss charges from 17 lawsuits pertaining to Libor-based over-the-counter ('OTC') transactions and other related deals.
In their standing, the banks cited that the investors’ allegations are improper and some other allegations no longer remain valid as these have been dismissed by previous court rulings.
Also, the banks claimed that some of the defendants don’t fall under the jurisdiction of the court. Per the defense lawyers, "For foreign banks, these (LIBOR) submissions originated either from London or the bank's home country.” Hence U.S. Dollar Libor submissions by domestic banks "were made by employees outside of the United States.”
LIBOR – All You Need to Know
LIBOR is an important benchmark that financial institutions use to set the interest rates for lending purposes on numerous financial transactions. It is used to set interest rates in trillions of dollars worth of loans and investments. Further, LIBOR is often used for pricing of several financial instruments including interest rate swap transactions and futures contracts.
LIBOR is set by the BBA. It is calculated for 10 currencies including the U.S. dollar. On a daily basis, the member banks submit a figure based on the estimation of what rate they would be charged when borrowing funds from other banks. Scrapping the highest and the lowest rate, LIBOR is calculated by averaging the remaining rate submissions. Following the calculation, Thomson Reuters publishes the figure on a daily basis.
How Banks Gained
It is alleged that banks were engaged in conspiracy to submit lower rates to the BBA for artificially suppressing LIBOR during the financial crisis. Higher rates would project the companies as financially weak, hence, the suppression of their rates estimations aided in presenting a secure financial health of the companies and benefiting from their investments in financial products tied to LIBOR during that period.
Adverse Effect on Investors
In the LIBOR rate-fixing scandal, the victims were primarily the public and private institutional investors, such as municipalities and pension funds. Institutional investors were hit as the bond market is heavily dependent on LIBOR. Further, such investors are considerably exposed to investment losses stemming from purchase of interest rate swaps, which most of the time are tied to LIBOR.
In a normal swap transaction, the investor exchanges the floating interest rate to bond investors for a fixed rate. The issue was that though institutional investors paid fixed rates to their banks, the floating rates they received in return were tied to LIBOR. Hence, on account of suppressed LIBOR, institutional investors claim to have received diminished returns from these swap transactions.
Bottom Line
While Libor manipulations by several banks have been detected by global authorities, we look forward to the gradual resolution of such matters. Several banks that faced similar charges have settled in recent times.
Regarding the latest issue, plaintiff attorneys are expected to file counter arguments, and both parties may present legal arguments, before Judge Buchwald issues a decision.
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