Where a swap or hedge is subject to the LIBOR rate, you need to consider the implications of the recent revelations that some banks were submitting data to skew the results of the LIBOR rate.
LIBOR rates are set by the British Bankers Association. The London Interbank Offered Rate ("LIBOR") is a primary benchmark for short-term interest rates globally. It is used as the basis for settlement of interest rate contracts on many futures and options
exchanges. It is used in loan agreements throughout the global markets, including mortgage agreements. It is also considered a barometer to measure the health of financial money markets.
Whereas central banks (such as the US Federal Reserve and the European Central Bank), fix official base rates monthly, LIBOR reflects the rates at which contributor banks borrow money from each other each day. It relates to the world’s ten major currencies
and takes into account 15 borrowing periods, ranging from overnight to 12 months loans. Once calculated, all LIBOR figures are distributed by Thomson Reuters on a daily basis. The figures appear on more than 1 million screens around the world and are widely
reported by the media, wire services and online.
On 27 June 2012, the Financial Services Authority ("FSA") announced that it had imposed a fine upon Barclays Bank Plc for "misconduct relating to the London Interbank Offered Rate ("LIBOR") and the Euro Interbank Offered Rate ("EURIBOR")." The fine was for
£59.5 million pounds – the largest fine imposed by the FSA. The US Department of Justice and the Commodity Features Trading Commission imposed fines worth £102 million and £128 million pounds respectively.
HSBC has been implicated in this scandal and has received a subpoena from The Attorney Generals of New York and Connecticut to face questions about its activities. It appears that HSBC, in addition to a further six banks, submitted data that did not represent
the true interest rates charged by HSBC, thereby skewing the results published each day for LIBOR.
If the rates submitted were not a true reflection of actual interest rates charges, the LIBOR rate was wrong. If the banks induced their customers to enter into hedging agreements that were based upon a rate that was, in effect, a fiction, what are the implications?
Were they misled? Was it a misrepresentation and, if so, was it a fraudulent misrepresentation?
If you consider that you may be affected by this issue, please contact Alison Loveday or Kalvin Chapman by email on
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employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.