The London Inter-Bank Offered Rate (LIBOR) is a benchmark reference rate that is central to the process of financial markets globally and forms the basis for trillions of dollars of financial transactions. LIBOR was created to represent the cost of unsecured funding in the open market for the largest financial organizations.it was developed to show the rates at which banks borrowed money from each other daily. These rates formed the basis in determining the charges they would subject to their customers. Student loans, credit cards, mortgages plus other commercial and consumer lending instruments mostly used LIBOR as a reference date. The British Bank Association (BBA) is charged with the responsibility of defining, setting and managing LIBOR. BBA which took the supervision of the reference rate in 1986 is a trade association with more than 200 member banks that contribute on the issues regarding U.K’s financial and banking services industries. The BBA officially published the first LIBOR rates in three currencies: British pound, U.S. dollar and Japanese yen. As of 2012, LIBOR was realizing for 10 currencies with 15 maturities produced for each. The rates range from overnight to one year, hence BBA releases 150 rates each business day.
The BBA defines LIBOR as a hypothetical rate at which banks borrow from each other in a particular maturity for an indeterminate amount. Their specific definition is “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 11:00 A.M London time.”
The LIBOR reference rate is set by various panels of banks that contribute submissions for each currency. For the U.S dollar LIBOR, 16 banks submit the rates, Barclays included. Each financial institution submits its rates in an electronic spreadsheet daily between 11:00 a.m and 11:10 a.m to Thomson Reuters, the firm that manages the LIBOR rate setting procedure for the BBA. Reuters then applies the trimmed mean concept to come up with the LIBOR rate for each maturity. For the U.S dollar rates, the trimmed mean involves eliminating the four lowest and highest rates submitted and averaging the rest of the eight submissions. This is followed by Reuters sharing the averaged LIBOR rates to a number of financial information services and news outlets globally, by midday in U.K.
LIBOR is an extremely important benchmark reference rate that is relied on by multiple contracts worldwide. The market ought to be confident that the institutions involved in submitting numbers to set LIBOR put the integrity of the market in mind and are not guided by their own interests. Therefore Barclays’s case involving their unethical conduct surrounding their submissions affected financial markets worldwide.