NYSE Euronext Inc.
) announced that it has become the first exchange to be appointed
to administer the benchmark interest rate for short-term
unsecured loans - London Inter-Bank Offered Rate (LIBOR). The
achievement would solidify its fundamental base through
NYSE has won this esteemed contract on a nominal token expense
of £1 million ($1.49 million) and is expected to manage LIBOR by
early 2014. The company will manage LIBOR through a new division
- NYSE Euronext Rate Administration Ltd. - by implementing a
competitive bidding process.
The LIBOR Story
LIBOR is used for over 500 trillion contracts across the
globe, within dealings ranging from derivatives, bonds, mortgages
and student loans to credit card bills, among others. The
London-based British Bankers' Association (BBA) initiated this
interest rate benchmark in 1986.
Currently, the interest rate is computed through a daily poll
by Thomson Reuters on behalf of the BBA. In this poll, banks and
firms are asked to estimate the rates for about 15 different time
durations and in various global currencies, the average of which
is set as the LIBOR.
However, this global benchmark rate lost color last year, when
several banks involved in estimating this rate were found guilty
of manipulating LIBOR in order to gain from derivative trading
positions. Since then, UK's Financial Conduct Authority (FCA)
began regulating LIBOR, while many guilty banks such as
Royal Bank of Scotland Plc
) were penalized recently with over $2 billion in both the US and
UK. While the investigations are going on, more financial
institutions are being brought under the radar.
LIBOR - Boon or Bane for NYSE?
Following the rate-rigging case, a neutral committee of
regulators from the UK Treasury chose NYSE, while 2 other
UK-based rival exchanges had submitted tenders for managing
LIBOR. However, NYSE awaits the approval of FCA, which will watch
over the LIBOR trade.
While this new proposition raises commercial and growth
opportunities for NYSE, setting up a new LIBOR platform could
cost NYSE about £1.6 million ($2.38 million), along with an
estimated operational cost of £1 million annually.
Although NYSE aims to revive the lost glory of LIBOR, the
global regulators are concerned regarding a financial institution
taking control of it. Most of the market investors and policy
makers prefer an independent third-party to compute this rate
with transparency, which could mitigate the risk of further
rigging of globally acknowledged rates in the future.
Hence, considering the pros and cons of the scenario, we
currently remain on the periphery to analyze further
developments. Barclays, UBS and NYSE carry a Zacks Rank #3
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