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 diversification.
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 Barclays Plc (BCS - Analyst Report), UBS AG and Royal Bank of Scotland Plc (RBS - Snapshot Report) 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 (Hold).