The Far-Reaching Impact of the LIBOR Scandal

July 25, 2012

With arrests looming in the US and Europe,  prosecutors are presenting a better pictures of how traders allegedly sought to influence the London Interbank Offered Rate (LIBOR), the average interest rate that banks charge when they lend to each other.   While we are seeing traders being charged and banks like Barclays paying penalties (and Barclays is sure to be just the first) a bigger concern may be the more far-spread problem regarding what this means to investors across the globe. 

If, as is being suggested, LIBOR was understated for a substantial amount of time during the financial crises of 2008 it would have a significant impact on financial instruments and derivatives that use the LIBOR as their base rate.   Depending on what side of the derivative you were trading the impact could have been positive or negative to portfolios holding the securities.  Since trying to determine what the “correct rate” should have been during this time would be difficult at best, it may be impossible to ever truly assess the damage that this has caused to pension funds, hedge funds etc.  

While we come to understand more of the alleged manipulation of the rates, more questions are surfacing regarding  how this affects individual asset managers and what adjustments (if any) will need to be made.  Going forward will derivatives continue to use the LIBOR as heavily?  What alternative index could be used?  What does this mean to their current portfolios?

Asset managers need to be prepared to assess and react as they understand the impact.  This may mean adjusting underlying rates, or changing the base index itself and reflecting that change across all portfolios and strategies.   And when these changes are made, there needs to be full transparency for regulators and investors alike.  Flexible accounting systems like PORTIA help asset managers make this type of adjustment by easily identifying any security that links to a particular index (i.e. LIBOR), make the adjustment once and have it reflected in all portfolios holding those instruments.  Using PORTIA’s variable rate securities module (VRS) clients have support for multiple rates and resets.  The VRS module also handles lag time for index resets using holiday calendars to accurately make and track the rate changes.   PORTIA will track and store all historical changes to be easily reported on and reflect the adjustment in any portfolio.

Will all of this exposure lead to more regulation of LIBOR or the usage of another rate all together?   Only time will tell but, what we do know is the actions of these traders and banks will have a widespread effect on asset management across the globe.  Are you prepared to handle the ramifications?

– David Craig, Senior Sales Consultant

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