Is it just obviously true that if (1) you had a Libor-based loan or swap or whatever, (2) Libor was intentionally manipulated by a bank or a scheming cabal of banks, and (3) that manipulation moved Libor against you and cost you money, then (4) you should be able to sue those banks to get back that money? Maybe? But then what do you do about this?
The preliminary analysis of individual quotes from panel banks shows that some anomalies can be found in the submissions, despite Thomson Reuters sanity checks. These anomalies can be seen as fat finger errors. For example on 12 June 2004, Bank 30 provided quotes between 44% and 55.5% for all tenors, and on 14 August 2006, the same bank provided quotes of 66% for a range of maturities (1 week to 3 weeks and 2 months to 5 months) as indicated in Chart 2.
That’s from the European Banking Authority – European Securities and Markets Authority report and recommendations on what to do about Euribor, a slightly less corrupt Continental analogue of Libor overseen by the European Banking Federation. Euribor was not, you’ll be pleased to know, 44% for any tenor on any date in 2004, but some of these fat finger errors do seem to have moved Euribor, though by mostly trivial amounts.
When banks sign on to do M&A engagements, you may recall, they negotiate very carefully over exactly who can sue them for what; basically, only their direct clients can sue them, and only for gross negligence and fraud. Someone they’ve never met suing them for accidental mistakes is right out. With Libor, and Euribor, we’ve seen some big regulatory settlements for obvious intentional fraud. But the private lawsuits – users of [__]ibor suing [__]ibor panel banks1 – are just getting started and raise all sorts of fun issues about who owes what sort of duties to whom. If you and I sign a Libor swap between us, and across the globe some guy at UBS is manipulating Libor, why should he owe us any money? And if he was responsible for our trades, why would he want to be a Libor submitter?2 And if he owes us damages for manipulating Libor, why shouldn’t “Bank 30” owe someone damages for moving Euribor by negligently submitting crazily wrong quotes?
These are perhaps purely theoretical questions – there’s apparently enough manipulation to go around in historical Euribor setting, without pestering anyone over long-forgotten fat fingers; while going forward Euribor may not be susceptible to such errors because the EBA/ESMA recommendations include things along the lines of “have banks and Thomson Reuters, like, check submissions to see if they’re nuts.” But they fall along a continuum of Euribor uncertainty, from “blatant intentional profit-oriented manipulation” through “existential uncertainty about what Euribor is” down to “fat fingers.”
The blatant intentional manipulation, and the fat fingers, we can optimistically assume will be reduced with increasing regulatory focus on Euribor. But the existential unease? I dunno. EBA/ESMA note that “The definition of Euribor is not sufficiently clear as it is based on terms which create ambiguity.” That definition is “is the rate at which Euro interbank term deposits are offered by one prime bank to another prime bank within the EMU zone,” and EBA/ESMA see a few problems with that.3 But they have a recommended solution:
The Euribor definition should be adjusted for more clarity. In particular, the term “prime bank” needs a clear definition. The term “interbank transactions” also needs to be clarified and, if needed, to be broadened and adjusted.
As the Journal drily puts it, “the European regulators instructed the EBF to clarify such definitions, but didn’t provide any guidance about how the group should do that.” Which is kind of ironic, since the lack of clear and specific instructions is sort of what got them into this trouble in the first place.
Regulators Urge Quick Revamp of Euribor [WSJ]
EuriBORE: the recommendations, the fat fingers, the inconsistencies [FTAV]
ESMA and the EBA take action to strengthen Euribor and benchmark rate-setting processes [EBA]
1. Where [__] = L, for the most part, these days, given America’s quickness on the draw, lawsuit-wise, but once there are a few regulatory settlements you can expect [__] = Eur, T, etc.
The two European regulators also voiced concern Friday that some banks recently decided to stop contributing data to Euribor. “There should be stigma attached to leaving the panel,” Mr. Enria said. “Banks should feel an obligation to continue participating.”
Three banks have left the panel in the past week, and a fourth has said it is reviewing its options.
- The definition of what is a Prime bank has not been outlined. This could create some uncertainty for panel banks and may result in difficulties in assessing the reliability of the quotes provided by panel banks. Some further ambiguity comes from the criteria that should be fulfilled to be a panel bank such as enjoying high credit standards and high reputation which may be understood as a kind of proxy for being a prime bank.
- While the Euribor Steering Committee has created a working group seeking to define what a prime bank is, possibly by using a credit rating, there was no final decision on this and Euribor-EBF is seeking guidance from regulators on the definition of a prime bank.
- There are no requirements to use any evidence as a basis for a quote – to the best of their knowledge is not prescribed in any way. This makes it difficult to assess the quality and accuracy of the quotes.