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Libor Banks Subject to U.S. Conspiracy Jurisdiction, Court Says

Bob Van Voris
Thu, December 30, 2021



(Bloomberg) -- JPMorgan Chase & Co., UBS Group AG and other global banks are subject to U.S. jurisdiction for allegedly manipulating the London Interbank Offered Rate, the federal appeals court in New York ruled.

A three-judge panel ruled Thursday that U.S. courts can exercise “conspiracy jurisdiction” over the banks if other members of the conspiracy took steps to advance the scheme from within the U.S. The appeals court reversed a 2016 ruling by U.S. District Judge Naomi Reice Buchwald, who dismissed claims on the ground that her court lacked jurisdiction over the bank defendants.

Buchwald is overseeing a multidistrict litigation that includes dozens of antitrust suits by institutional investors, including municipalities and public pension funds, alleging Libor manipulation. Though many of the 16 defendant banks are headquartered in the U.S., they participated in setting Libor routes through their membership on a panel of the British Bankers’ Association.

But the appeals court pointed to evidence that senior executives based in the U.S. directed employees involved in alleged Libor manipulation. The judges cited an email in which a New York-based JPMorgan Chase executive allegedly told the bank’s Libor submitter to “err on the low side” when setting the rate and stressed the importance of staying in “the pack.”

In another email cited by the appeals court, a U.S.‐based employee of Citibank allegedly told the bank’s Libor submitter that “we should take a leadership [role] in bringing these Libors back to more sensible levels.”

“Plaintiffs have alleged overt acts taken in the United States to advance the suppression conspiracy; at this stage of the litigation, that is enough to establish personal jurisdiction,” U.S. Circuit Judge Richard Sullivan wrote on behalf of the three judges.

The jurisdiction decision is a win for plaintiffs, but the appeals court ruled against the investors in upholding Judge Buchwald’s decision that Charles Schwab Corp. and a group of bondholders who purchased Libor-related bonds from third parties lacked the legal standing to pursue antitrust claims against the banks.

The case is In re LIBOR-Based Fin. Instruments Antitrust Litig., 17-1569, Second U.S. Court of Appeals (Manhattan).

Explainer-The Libor era nears its end

John McCrank and Karen Brettell
Tue., December 28, 2021

FILE PHOTO: Views of the City of London Financial District, Britain

By John McCrank and Karen Brettell

NEW YORK (Reuters) - Libor, or the London Interbank Offered Rate, will no longer be used for new derivatives and loans as of Jan. 1. The benchmark and reference rate, which had $265 trillion linked to it globally at the start of 2021, is being scrapped in the biggest shake-up to markets since the introduction of the euro in 1999.

WHAT IS LIBOR AND WHY IS IT BEING REPLACED?

Libor, once dubbed the world's most important number, is a rate based on quotes from banks on how much it would cost to borrow short-term funds from one another. Although it dates to 1969, it was formalized in 1986 and has been used as a reference rate for a vast array of financial products, including student loans, credit cards, corporate loans and mortgages.

Libor was discredited after the 2008 financial crisis when authorities found traders had manipulated it, prompting calls to reform and eventually replace the tarnished rate. Several global banks were fined.

WHAT IS REPLACING LIBOR?

Regulators have said no new business can be done after Dec. 31 using Libor, which has 35 permutations across five currencies, the U.S. dollar, the British pound, the euro, Swiss franc and Japanese yen. Some Libor tenors - the length of time remaining before a contract expires - linked to the U.S. dollar, however, will continue until the end of June 2023 to allow most "legacy" or outstanding contracts to mature.

Libor is being replaced by alternative rates, with a preference toward those recommended by central banks that are based on actual transactions, making them harder to rig. [L1N2TC0XL]

WHAT ARE THE RISKS GOING FORWARD?

The vast majority of Libor tenors will not be published after Jan. 1. But a few U.S.-dollar tenors will continue through June 2023, which could create legal problems for companies with debt still tied to the rate, analysts said.

To help minimize disruptions, New York state passed a law allowing "tough legacy" contracts - those that expire after June 2023 and do not have fallback language specifying an alternative rate and thus cannot be amended - to use the Secured Overnight Financing Rate, or SOFR, recommended by the U.S. Federal Reserve. Congress is working on a similar bill.

In the UK, regulators also said six sterling and yen Libor rates will continue in "synthetic" form - the Bank of England's Sterling Overnight Index Average, or SONIA, combined with a fixed spread - for a year, giving market participants more time to shift to alternative rates for existing contracts.

LIBOR LIQUIDITY

Much of the U.S. dollar derivatives market has already shifted to SOFR. Relatively large exposures based on Libor remain, however, in the Eurodollar space, for short-term contracts used to speculate or hedge against interest rate moves. (For a graphic on CME SOFR futures volumes

Liquidity in these contracts is expected to dwindle, which will likely make it harder for investors to hedge existing Libor-based exposures. Investors will also need to adjust to using alternative instruments when making bets on future rate moves.

LOAN PRICING CHALLENGES

The shift to SOFR from Libor also brings pricing challenges for borrowers and loan issuers, who prefer exposure to credit benchmarks that will adjust to shifts in credit market conditions.

SOFR is based on the U.S. repurchase agreement market, which has no credit risk and may fall during times of stress. Libor, by contrast, measures bank borrowing costs and rises during periods of stress.

Lenders are adapting by pricing loans with a spread to SOFR. However, there are risks that this spread could underprice risks if there are unexpected periods of credit stress.

(Reporting by John McCrank and Karen Brettell; Editing by Dan Grebler)



The plumbing of the world's financial system has been replaced — and almost nobody noticed



Felix Salmon
Tue, December 28, 2021

Banks and regulators around the world have managed to replace the plumbing of the entire financial system, even as almost nobody has noticed.

Driving the news: As of Monday, Libor — the interest rate that once underpinned some $300 trillion in financial contracts from derivatives to corporate credit lines — will effectively be dead.

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Why it matters: The easily-manipulable Libor was at the center of one of the biggest scandals in the history of finance, which came to light back in 2012.

Banks racked up some $9 billion in fines and a number of traders received prison sentences.

Libor has now been replaced with much more solid and reliable benchmarks.

How it works: Banks make money from lending money out at a higher interest rate than their own cost of funds. Libor was supposed to be a measure of banks' cost of funds, so if a bank priced a loan at, say, 1 percentage point over Libor, then it knew its profit margin would be 1 percentage point.

Trillions of dollars of loans and derivatives were traded based off Libor, which meant that if traders could — illegally— push it up or down by even a few hundredths of a percentage point, they could make enormous sums of money.

Because Libor was generated by surveying banks and asking them what their interbank lending rates were, it was easy for the banks to lie in the direction that would make their traders the most money.

Where it stands: Libor is being replaced by a suite of new products — Sonia for British pounds, Tona for Japanese yen, Saron for Swiss francs, and so on.

The U.S. dollar is the only currency that will still continue to publish an official Libor rate, but even that will only be used for legacy loan products. All new loans will have to be priced off something else. A long-standing but less famous benchmark called SOFR, which is published by the New York Fed, is the leading replacement.

Between the lines: Switching over from Libor to the new benchmarks was a massive undertaking. The world's financial markets couldn't just shut down for planned maintenance and come back refreshed on Monday morning.

Instead, deeply embedded infrastructure needed to be replaced while it was still being used intensively.

Even the Federal Reserve, which led the charge to end Libor in the U.S., ended up using the old benchmark for its pandemic-era Main Street Lending Program.

The bottom line: The Libor days are over. It's a testament to hard work at thousands of companies — exacerbated greatly by the pandemic — that nothing broke during the transition.