Little chart from November 29, 2007 … big gap in one month Libor rates … 40 bips … maybe it’s jumps like this that lead interdealer broker ICAP to work on developing a system called the New York Funding Rate, which would poll some 40 banks to establish a daily funding barometer.
And WSJ.com is reporting that part of NYSE Euronext, “Liffe, is considering the launch of new short-term contracts that would allow investors to bet on the direction of interest rates. ”
An exchange traded solution available to all market participants and an OTC solution for dealers… both must attract liquidity to get off the ground… good race to watch…
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And if the new measure does show Libor has been printing lower than the true cost of interbank borrowings, a lot of consumers and businesses with loans tied to Libor could get a nasty shock. It’s been estimated that loans and derivative contracts totaling roughly $150 trillion (more than $20,000 for every person on earth) are indexed or tied to Libor in some way.
In fact, the universe of financial instruments tied to Libor is so huge that some bankers are nervous that any efforts to tweak the way Libor is collected could make a bigger mess.
Libor “is extremely important,” said Terry Belton, head of fixed income strategy at J.P. Morgan Chase. “We would probably create more problems by changing it in a material way than we would solve,” he said.
Libor rises…
ICAP’s efforts to publish a new bank lending rate follows an unusual period where Libor as well as other bank lending rates have frequently topped central bank policy rates, meaning banks are paying more to borrow because of heightened credit and liquidity risk
The difference, or spread, between the three-month U.S.-dollar Libor and the effective federal funds rate rose to more than 80 basis points on Wednesday. Usually, dollar-denominated Libor tracks closely with the fed funds rate. See earlier story on Libor’s rise.
By other measures, costs for banks’ borrowing needs have also been rising. The spread between three-month Libor and overnight index swaps has been climbing since February. What’s known among credit analysts as the BOR-OIS spread gives a view of Libor that strips out expectations that central banks will raise or lower rates.
These spreads “are all signs that there is stress in the market,” said Eoin O’Callaghan, market economist for BNP Paribas in London.
Such signs of stress are worrisome for the Fed, which has $462 billion in special lending programs to financial institutions as it tries to get money flowing in frozen pockets of the credit market.
Notwithstanding efforts by the Fed and other central banks to “meet panic demands for liquidity” by making more funds available to financial institutions, still “many markets are not functioning normally,” noted Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in a speech Tuesday.
In contrast to rates that reflecting bank costs, indexes that track perceived credit risk and rates paid by corporations have been tumbling. Markit’s index of high-grade, North American credit default swaps has fallen about 27% since late-March. The spread between safe-haven 10-yield Treasury notes and bonds issued by companies with Baa ratings, which indicate riskier but still investment-grade companies, has also narrowed since mid-March.
http://www.marketwatch.com/news/story/how-much-banks-paying-borrow/story.aspx
BBA addresses Libor criticisms
By Gillian Tett
Published: May 8 2008 22:58 | Last updated: May 8 2008 22:58
The British Bankers Association will submit a report about the future of the Libor benchmark to its key advisory committee later this month, as part of a closely watched review into how this benchmark rate is calculated.
The report will be used by the BBA’s foreign exchange and money market advisory committee to decide whether the BBA needs to overhaul Libor, which is currently calculated each day for a series of currencies, as an average of a group of quotes submitted by banks.
The BBA report is unlikely to call for any radical change, since senior officials at the group believe that it would be unwise to start a dramatic overhaul at a time of market flux. BBA officials also continue to insist the basic process for calculating Libor is sound, and point out that this system provides market stability, since it has a 23-year track record.
But the discussions in the BBA committee are attracting considerable attention in the broader banking industry.
The recent credit turmoil has triggered a flurry of complaints that Libor has become inaccurate as a benchmark of sentiment, because it is drawn from voluntary quotes, rather than actual trades.
Consequently, the BBA advisory committee may come under pressure to consider some overhaul of this benchmark in the future.
One factor that could increase the pressure on BBA is that ICAP, the interdealer broker, is launching an alternative US rate benchmark, the New York Funding Rate, which surveys borrowing rates between US banks.
The main source of controversy in relation to Libor is centred around the dollar Libor index, which is set in London before the US markets open. Only a small proportion of the banks which contribute the quotes are domiciled in the US, even though dollar Libor is used to set a large volume of dollar loans and derivatives contracts.
Some bankers think that the BBA advisory committee could in the future expand the list of banks which submit quotes to include more US-based banks or calculate the rate again later in the day. But BBA officials have warned that it would be difficult to implement these type of changes rapidly.
http://www.ft.com/cms/s/0/e00779a0-1d48-11dd-82ae-000077b07658.html
ICAP’s Libor Alternative Lacks Clear `Timetable’; Seeks Banks
By Gavin Finch and Ben Livesey
May 14 (Bloomberg) — ICAP Plc, the biggest broker of transactions between lenders, has no “concrete timetable” for a U.S. alternative to the London interbank offered rate as it seeks to sign up banks.
“We hope to launch it soon, but we don’t have a concrete timetable,” Lou Crandall, chief economist at the London-based company’s New York research unit, said in an interview. “We’re having individual discussions with banks who understandably want to make sure they know what they’re getting into before taking the jump.”
ICAP plans to start the New York Funding Rate as the accuracy of Libor, a benchmark for corporate loans, at least $347 trillion of derivatives and 6 million U.S. mortgages, is being called into question. For the first time since 1998, the British Bankers’ Association, which oversees Libor, is considering changing the way it sets the measure, according to Chief Executive Officer Angela Knight.
The new index will be based on an anonymous daily survey of at least 24 banks, Crandall said. ICAP will ask participants each morning to estimate the cost of funding for one- and three- month loans to a “representative” bank. NYFR would be calculated using the quotes of the middle half of that group. The Wall Street Journal reported on May 1 that ICAP planned to introduce the new gauge as soon as last week.
Libor Benchmark
Libor is used as a benchmark for the $1.2 trillion of interest-rate swap contracts traded every day, according to the Bank for International Settlements in Basel, Switzerland. Derivatives are financial instruments derived from stocks, bonds, loans, currencies or commodities, or linked to specific events like changes in interest rates or the weather.
ICAP may not succeed in establishing its measure as an alternative to Libor because so many securities and loans are tied to the BBA’s measure, according to Christofferson Rob & Co., a New York-based money manager.
“It is not clear to me who is agitating for a change,” said Brad Golding, a managing director at the company. “Libor is a very established measure.”
The BIS said in a March report that some lenders may have submitted inaccurate information to the BBA to prevent their borrowing costs from escalating. Banks are understating rates on concern they will be perceived as weakened by the credit turmoil that forced banks to record $323 billion of losses and writedowns, analysts at New York-based Citigroup Inc. wrote in a report last month.
`Serious Issues’
The association asks 16 member banks including HSBC Holdings Plc, Citigroup and UBS AG how much it would cost to borrow from each other for 15 different periods in currencies including dollars, euros, Swiss francs and pounds. It then calculates averages and publishes the results every day after 11:30 a.m. in London. Only three of the member banks are based in the U.S.
“We have not run away or hidden from the need for reform or the need for review” of “serious issues” in the U.K. financial-services industry, the BBA’s Knight said at a hearing of a parliamentary committee yesterday in London. The association is set to announce the results of its broadest review of the way it sets Libor in a decade on May 30.
The BBA said April 16 that any member banks found to be misquoting rates will be banned.
“We have had contact with ICAP and they have assured us that this is complementary, and in no way were they intending to do something competitive to Libor,” Knight said in an interview May 12.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aPMDngOqM.cE&refer=home
Micheal Spencer of ICAP being interviewed at Bloomberg…
Video = 5:12 min
http://www.bloomberg.com/avp/avp.htm?T=av&clipSRC=mms://media2.bloomberg.com/cache/vv3LVr5xOC1Q.asf
Libor Cracks Widen as Bankers Struggle With Reforms (Update1)
By Gavin Finch and Ben Livesey
May 27 (Bloomberg) — Few companies have suffered from the subprime mortgage collapse more than UBS AG, which has taken $38 billion of writedowns and losses, replaced its chief executive officer and chairman and saw its stock tumble 60 percent.
Yet on 85 percent of the days between July and mid-April, the Zurich-based bank told the British Bankers’ Association that it could borrow in the money markets at lower interest rates than its rivals. Not even the U.K.’s Lloyds TSB Group Plc, which only wrote down $1.4 billion, could obtain the rates UBS said it was able to get, according to data compiled by Bloomberg.
“Even when the market knew UBS was massively exposed and Lloyds wasn’t, that was not reflected in Libor,” said Antony Broadbent, an independent banking consultant and former analyst at Sanford C. Bernstein & Co. in London.
Such discrepancies are creating a crisis of confidence in the London interbank offered rate published daily by the London- based BBA and taken from the contributions of UBS, Lloyds TSB and 14 other banks. Rates on corporate bonds, leveraged buyouts loans, derivatives and even U.S. mortgages are pegged to Libor.
The criticism has prompted the BBA to accelerate a review of the 24-year-old system of setting rates. The findings, due May 30, may determine how fast the banking industry recovers from the credit crisis.
http://www.bloomberg.com/apps/news?pid=20601087&sid=amURZMCR_wkI&refer=home
Libor Proxies Gain as Traders Seek Truth With Swaps (Update2)
By Liz Capo McCormick
May 29 (Bloomberg) — Traders are starting to use alternative measures for borrowing costs as the British Bankers’ Association struggles to keep the London interbank offered rate as the global standard.
Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits.
One option growing in popularity is overnight indexed swaps, a gauge of expectations for central bank rates. The Federal Reserve uses the one-month OIS rate to set the minimum bid level when it lends cash to banks through its Term Auction Facility. The Fed has auctioned $510 billion through the TAF since December.
“The OIS rate is something I look at a lot more closely than I used to,” said Nish Popat, head of fixed income in Dubai at Emirates NBD PJSC, the Persian Gulf’s biggest bank by assets. “It gives you a better idea of where the lending and borrowing level between banks is and it’s a market-traded price.”
Libor gained attention in August when global borrowing costs rose as the U.S. subprime-mortgage market collapsed. The BBA said April 16 it would speed up an annual review of the 24- year-old system and threatened to ban member banks found misquoting rates. It’s scheduled to publish the findings of the review tomorrow.
`No Guesswork’
Libor is set once a day by the BBA, which publishes the rate after asking 16 member banks how much it would cost to borrow from each other in a range of currencies. The three-month dollar OIS rate fluctuates through the day.
Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate over the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.
“OIS rates have the advantage that they are set off the fed funds effective rate, which is an overnight rate based on a volume-weighted average of trades that occur each trading day through the major brokers,” Eric Liverance, head of derivatives strategy at UBS Securities LLC in Stamford, Connecticut, wrote in report dated May 27. “There is no guesswork involved.”
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as changes in the weather.
Debt-Insurance Costs
Rates quoted by Libor members show discrepancies and have little correlation with their costs of insuring debt from default. UBS AG, whose default-insurance costs rose 919 percent between July 2 and April 15 as it racked up $38 billion of writedowns and losses, quoted dollar-borrowing costs that were lower than its rivals on 85 percent of the days during that period, according to data compiled by Bloomberg.
“Credit-default swaps are a true market-priced measure of risk, whereas Libor is a subjective survey,” said Antony Broadbent, an independent banking consultant and former analyst at Sanford C. Bernstein & Co. in London.
Rate Proxy
OIS rates can be used as a proxy for interest-rate expectations and tend to be lower than Libor “under normal market conditions,” the Basel, Switzerland-based BIS said in its March report.
The three-month dollar OIS rate was 2 percent, while three- month dollar Libor was 2.65 percent, a difference of 65 basis points. The spread averaged 11 basis points in the 10 years prior to August, before widening to as much as 106 basis points on Dec. 4. A basis point is 0.01 percentage point.
Trading in fed fund futures surged 55 percent in April from the prior month to an average of about 98,000 contracts a day, while transactions in Eurodollars, which are priced off Libor, slid 7.5 percent to an average 2.6 million contracts, according to CME Group data. Futures are agreements to buy or sell assets at a set date and price.
“There is an interest rate being charged in the market and people need to know what that rate is,” said Michael Gorham, former director of the U.S. Commodity Futures Trading Commission and head of the IIT Stuart Center for Financial Markets at the Illinois Institute of Technology in Chicago. “Swaps and all kinds of other things like mortgages and credit cards are referenced to Libor.”
`Viable Alternative’
The chance that OIS rates, which aren’t used like Libor as a peg for contracts and other agreements, will emerge as a viable alternative benchmark is low, according to Liverance. Central banks may be wary of OIS rates taking root because trillions of dollars of derivatives would get tied to their rates, he wrote.
“If Libor can get through this with fairly limited changes and remain the interest-rate benchmark, it will have survived a strong test,” said William Porter, European credit strategist at Credit Suisse in London. “But one likely result is people are going to start using some of the alternative benchmarks.”
NYSE Euronext’s Liffe derivatives market said this month it will offer futures based on Sonia and Eonia, the sterling and euro overnight interbank averages. ICAP Plc, the biggest broker of transactions between banks, is testing the so-called New York Funding Rate, based on an anonymous daily survey of at least 24 banks, according to Lou Crandall, chief economist at ICAP’s New York research unit.
Libor “tells a very complicated story,” said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam, a unit of the biggest Dutch financial-services company. “If it’s making calls on the market and trying to access where expectations are, then it’s the OIS rates that I’d look at.”
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8IjIP_2L4E4&refer=home
Libor-OIS spread ‘will widen’
4 June 2008
Banks will continue to face difficulty in raising revenue, interest rate derivatives traders are predicting.
According to analysis from Credit Suisse, the spread between the inter-bank rate (Libor) and the overnight index swap rate (OIS) will widen - as banks show continuing reluctance to lend to each other in months to come.
High Libor spreads have been a key feature of the credit crunch - and have contributed to many banks finding themselves struggling to shore up balance sheets.
Carl Lantz at Credit Suisse commented: “The movement in the forward Libor-OIS spreads is telling you that the market is concerned that things can get even worse before they get better.
“Until all banks’ balance sheets are cleaned up and they’ve re-capitalized, there is going to be funding pressure.”
In total, large banks have declared $387 billion of credit crunch-related losses since the global financial crisis began last summer, Bloomberg reports.
http://www.bobsguide.com/guide/news/2008/Jun/5/Libor-OIS_spread_%27will_widen%27.html
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