Libor rigged

The London Interbank Offered Rate (Libor) came into the limelight recently. As mentioned in the news articles, the US Dollar Libor affects the cost of borrowing $10 trillion worth of loan and another $350 trillion in derivatives. The Libor rate is determined from the submission of “designated contributor banks”, and this is a completely arbitrary process carried out by the individual banks, in which the responsibility ultimately lies in the hands of a bunch of people. It comes as no surprise at all that they now came under investigation for manipulating the rates.

If you didn’t already know, SIBOR and SOR works in the same way, though, SOR is supposed to follow a mathematical formula, which ultimately is still based on a USD interest rate, which could be a figure plucked out of thin air. I would presume that the banks, having been spooked by negative SOR, would now look very carefully at the derivation of the SOR rates and do all that is in their means to ensure they are not on the loosing end.

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