Is LIBOR's legal backlog starting to kick in?

The real USD-LIBOR disappearance came at the end of June 2023. As the discontinuation was clumsily implemented a “synthetic” LIBOR was required and was published until 30 September 2024.

To our opinion, this was a fundamental mistake as we explained in the post “Synthetic LIBOR, genuine manipulation".

Now that the synthetic LIBOR period has ended, the real legal legacy for LIBOR can start. It seems that once more the court battle is rigged in favour of power in place by opposition to financial reality. We referenced the Bank of England rigging the LIBOR setting and later the trials of those involved in the setting in our post “Rigged: part 1 - Will there be a part 2?”

Now it appears that a discussion between private individuals (ISDA) about a new convention for new derivative trades is becoming a law for all on previously issued securities. The story is described in a Reuters article “StanChart welcomes 'clarity' from UK court ruling over replacement rate for Libor”.

The article indicates that:

“Standard Chartered wanted to change the three-month U.S. dollar Libor rate that was used to set dividends on some preference shares to one based on the Secured Overnight Financing Rate (SOFR).”

“The court ruled that SOFR was a "reasonable alternative rate".”

“A spokesperson for the funds' lawyers at Quinn Emanuel said in a statement that the ruling "enables Standard Chartered to impose a fundamentally different commercial bargain on its investors from what had been agreed"”.

I strongly disagree with the court and fully agree with the last sentence. This is what I demonstrated in an article in 2020, some of which was published in Risk.Net “Signing the Libor fallback protocol: a cautionary tale“. The preprint version of the article is available on SSRN: https://ssrn.com/abstract=4991976.

The compounding SOFR fallback was designed without fairness in mind, only simplicity from a legal perspective. This was enough for new trades as people entered into an agreement knowing all its terms and conditions. The SOFR plus ISDA spread replacement was never designed as a “reasonable alternative rate”, it is only an “alternative rate”.

Any proposal to change from LIBOR to SOFR plus spread must be supported by an in-depth analysis of the impact in terms of valuation and risk management. Any change requires the consent of all parties involved.

I'm available to act as an expert related to the "in-depth analysis of the impact in terms of valuation and risk management". You can review some of my past analysis in this context on my muRisQ professional blog: http://murisq.com/

Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it...
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in...
Read more

Treasury / Swap spreads are negative. And what?

In recent weeks there were several news articles related to the negative treasury/Swap spread. This is in particular the case of a Bloomberg article and a Zero Hedge blog . Some of the “information” in those notes are Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields […]  is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. Let’s be clear, to me, those claims are purely wrong , nothing is “ illogical ” in negative swap spread. But why do I rant about that in the “multi-curve framework” blog? Because it is exactly the same that ...
Read more