NYSE Wants To Be Responsible For Libor For Some Reason

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The Hogg Tendering Advisory Committee announced today that it's selling Libor to NYSE Euronext, which immediately raises questions like:

  • the "Hogg Tendering Advisory Committee"? Really? and
  • why would you want to own Libor?

So: one, yes, the Hogg Tendering Advisory Committee, my favorite name for a financial thing since the Tick Size Flexibility Act of 2013, was put in charge of picking someone to take over Libor. And, two, because it's profitable I guess?1 It's hard to tell; here's how the Hogg Committee described Libor's commercialization in its request for proposals:

Presumably NYSE Euronext got to actually see the numbers? Anyway, 12% of the Hoggers' evaluation of proposals for Libor administrators was based on the proposed business model for Libor,2 so presumably NYSE Euronext - who beat out at least a London Stock Exchange/Thomson Reuters bidding group to take over Libor - has a plan to, like, increase the licensing fees. NYSE being NYSE it probably involves selling some people access to Libor a few seconds before other people?3

It's hard to get too worked up about this though I guess you could try? Bart Chilton has never met a thing he couldn't get worked up about:

“We had a ‘fox guarding the henhouse’ issue here, and we should learn from that,” said Bart Chilton, a member of the Commodity Futures Trading Commission in the United States. “I firmly believe that having a truly neutral third party administrator would be the best alternative, and I’m not sure that an exchange is the proper choice.”

Others agree:

“The fact they are handing this to a derivatives exchange is a surprise,” Peter Lenardos, a financials and exchange analyst at RBC Capital Markets in London, said by telephone today. “It just doesn’t seem independent enough. They are taking the setting of Libor from the banks and giving it to an exchange not known as a benchmark provider.”

Meh. We've talked before about the theory that Libor would have been better if it had been more commercialized: if you're selling Libor as a valuable product, like the S&P index or whatever, then you have incentives to get it right. But of course BBA, the old Libor administrator, was selling it: they licensed it to people who needed to know Libor, and got paid licensing fees. They had every incentive to correctly report Libor. Just no incentive to have that Libor reflect bank borrowing costs, or be unmanipulated.

NYSE on the other hand is in the business of selling, not Libor data, but derivatives.4 But it's not in the business of owning derivatives. It has all the good incentives that Libor banks have (the desire to have Libor be a robust thing that makes customers confident in trading derivatives on it) but none of the bad ones (the desire to push Libor to favor their own derivatives book). If there's anyone who wants Libor to inspire confidence, it's a derivatives exchange. Wanting Libor to inspire confidence is not the same as making it inspire confidence, but I guess it's a start.

The Hogg Tendering Advisory Committee announces that NYSE Euronext is to be the new LIBOR administrator [Hogg Committee]
NYSE Euronext Subsidiary to Become New Administrator of Libor [NYSE]
NYSE Euronext to Take Over Libor [DealBook]
NYSE Euronext to Take Over Libor [WSJ]
NYSE Euronext awarded contract to run Libor [FT]
NYSE Euronext to Take Over Administration of Libor From BBA [Bloomberg]

1.There's a third question but it's boring, it's like "will this make Libor all better?" Meh to no, right? The problem with Libor was - is - that it's a survey asking a bunch of banks "how much do you pay to borrow dollars unsecured from other banks for six months" or whatever, and the answer was "I dunno, we never do that," and now the list of questions has been cleaned up a bit (no two-month Danish kroner Libor etc.) but the answer remains "I dunno, we never do that," but you can't write that so you instead write "0.23%" or whatever and if you're making up an answer anyway you might as well make up the answer that helps your derivatives book. Pretty much. Anyway now NYSE Euronext will collect those answers, huzzah.

2.So. Let's talk about this RFP / invitation to tender. The instructions include "11.1 All documents and correspondence relating to the tender response must be written legibly and in English." Imagine the feeling of value-add that the person who included that instruction felt. "Don't want any illegible proposals, do we? Write neatly, I always say!"

Also here are the criteria for evaluating proposals:

Do you think they went through with a scoresheet and actually added up scores? I just think that's a weird way to make actual commercial decisions. But you always see things like this.

3.But watch out for Eric Schneiderman! Needless, needless, needless to say, BBA currently sells Libor in two tiers, to people who pay for real-time data and delayed data, though the delay here is longer than two seconds. From the RFP again:

TR [Thomson Reuters] calculates BBA LIBOR for each currency and maturity in which BBA LIBOR is quoted using guidelines provided by the LIBOR Oversight Committee via the Code of Conduct for Contributor Banks. TR then distributes BBA LIBOR to particular BBAL licensees, from 11:45 LDN (for those licensees with the right to "live" data) or "delayed" from 17:00 LDN (for those licensees with the right to "delayed" data) each London Business Day.

4.It's also in the business of preventing other exchanges from competing with it, I guess? Like, exchanges love to sue each other to prevent them from using each others' indices. Presumably the Hogg Committee won't let NYSE keep Libor for itself and prevent other exchanges from trading Libor-based derivatives. Though I guess if you're another exchange now is a pretty good time to try to build a competitor to Libor.

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