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Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

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Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#41

Post by jwfxpr »

chinathrow wrote: post #23
smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

> There are checks built into LIBOR to discourage fraud https://en.wikipedia.org/wiki/Libor_scandal

'Discourage', obviously, is distinct from 'prevent'. But those checks were enhanced in the wake of the scandal, and it is based in large part on the strength of those enhanced checks that this conclusion about the underpinning validity of LIBOR has been drawn.

We can all agree, though, that the next iteration could do more to stop manipulation and fraud.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#42

Post by JumpCrisscross »

cm2187 wrote: post #21
smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

Also most banks got badly burned with fines after the Libor scandal and introduced a pretty strict process to ensure that doesn't happen again. The "fantasy" the article is referring to is the fact that large banks have to submit a number for every currency and every tenor every day, even if they didn't fund in that currency and that tenor that day. They will usually interpolate based on other tenors. However this is…

The most substantial change was reducing the number of currencies and tenors Libor is quoted in. Gone are the Australian dollar, Canadian dollar, New Zealand dollar, Danish krone, Swedish krona, 2 week, 4 month, 5 month, 7 month, 8 month, 9 month, 10 month and 11 month Libors [1]. That's an 80% reduction in the number of currency-tenors Libor is quoted in.

[1] https://en.wikipedia.org/wiki/Libor#Currency

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#43

Post by rbcgerard »

lordnacho wrote: post #2

Pretty much everything that has derivatives tied to it is manipulated. Option expiries, FX fixes as well. Or it was when I was looking at it. The thing is there are derivatives that are sometimes non-linear, things with triggers and barriers. When some large enough fish has one of these (eg by taking the other side vs a customer) they have an incentive to move the rate in whatever way they can. Whether it's getting s…

yeah - imagine what physical commodities traders can do in the physical market that can have huge financial derivative impacts for them...

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#44

Post by coliveira »

JumpCrisscross wrote: post #12
lordnacho wrote: post #2

Pretty much everything that has derivatives tied to it is manipulated. Option expiries, FX fixes as well. Or it was when I was looking at it. The thing is there are derivatives that are sometimes non-linear, things with triggers and barriers. When some large enough fish has one of these (eg by taking the other side vs a customer) they have an incentive to move the rate in whatever way they can. Whether it's getting s…

> This would happen even in exchange traded options. If you knew the specifics of the settlement window, you would know when the price would go wonky. Exchange-traded options settle on a predictable window; there's no "if you knew" to it [1]. Also, the price goes wonky near expiries because that's when delta approaches one. Market makers switch from hedging with derivatives to hedging with spot; that means jitters. N…

Your understanding of the market doesn't consider that there are big players who overshadow everyone else. Yes, everybody prepares for the expiration of an option, but very few players can do anything to influence prices. Only a handful of institutions can successfully trade around these expiries, which is what the commenter above is mentioning.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#45

Post by skybrian »

zzalpha wrote: post #36
JumpCrisscross wrote: post #24

Earlier quoted context omitted.

> We're well into ad hominem I'm not saying it is wrong because Taibbi wrote it. It's wrong because he got basic facts about interbank lending wrong, i.e. that it exists. I'm then passing along my observation that, whenever I've fact checked Taibbi, his facts have tended to be wrong. > Matt Levine...said the exact same thing Taibbi said there is no interbank lending. Libor is totally made up. Levine said that there i…

Honestly this is hair splitting. Ultimately the point remains: there isn't sufficient market activity to build a real value for Libor so it's basically made up from whole cloth Your nuance, while interesting if you care to dig deeply, doesn't change the conclusion. It's a distinction without a material difference.

What makes you think it's "not a material difference" and how would you know?

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#46

Post by JumpCrisscross »

smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

> they're against OIS instead

OIS stands for overnight indexed swap [1]. Like the fed funds rate [2], it's only quoted for one tenor: overnight.

In the United States we're somewhat spoiled with having a deep, reliable, market-based yield curve calculated every business day: the Treasury yield curve [3]. But if you want to approximate the cost of a bank borrowing for a given term on the wholesale unsecured market, Libor is still the default reference.

[1] https://en.wikipedia.org/wiki/Overnight_indexed_swap

[2] https://en.wikipedia.org/wiki/Federal_funds_rate

[3] https://www.treasury.gov/resource-center/data-chart-center/i...

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#47

Post by coliveira »

bboreham wrote: post #14
cperciva wrote: post #8

On the one hand, LIBOR is a completely made-up number. On the other hand, so are central bank rates. If you're going to peg transactions to a made-up number, is LIBOR really any worse than anything else?

Central banks actually will lend (or take deposits) at their rate. So in that sense it's not made-up.

Does it matter? Central banks are creating money, so of course they can pay the interest rates they made up from whole cloth.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#48

Post by ThrustVectoring »

lordnacho wrote: post #39
ThrustVectoring wrote: post #20

Earlier quoted context omitted.

Doesn't this work as an argument against cash-settling options and futures? Owning a giant pile of call options and driving the price up during the settlement window doesn't help you any if you have to unload a massive quantity of the underlying stock.

Forgot to mention it was mainly indexes I was talking about, and they are cash settled. Single stock options tend to be settled with actual stock, and at least in Europe tend to be a lot less liquid. And there's other problems with trading them, like other people knowing a lot more than the market maker about what's happening. You also have pin risk which seems to be like a magnet.

Yeah, sorry if that wasn't clear - I was thinking that the manipulation you saw with the options on index was because they were cash settled. If they were physically settled (somehow), then it doesn't help you to be the buyer at an arbitrarily high price of the underlying. You have to sell the underlying to profit off of the call options, you can't just support the price against all comers at the time of exercise.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#49

Post by NelsonMinar »

Taibbi's gonzo style is amusing shtick, but frequently exaggerates. If you'd rather read a boring but reliable Economist take on the same story: https://www.economist.com/news/finance-and-economics/2172581...

The facts are more or less the same in both stories.

Re: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

#50

Post by lomnakkus »

smallnamespace wrote: post #6

This is old news for large portions of the interest rate derivatives market, which is quickly moving towards OIS[1] rates instead, based on widely traded liquid instruments. Also, the implication that LIBOR is purposefully a scam is basically untrue. When LIBOR was first developed, it was an improvement on other interest rate benchmarks, and it also reflected current market conditions at the time, as banks actually d…

Just by your terminology, I trust that you know (at least somewhat) what you're talking about, so... is there an ELI5 for this stuff? I'm completely lost in these types of discussions. They seem absurdly complicated for (good|bad) reasons? Are we looking at another complexity bubble that's going to burst in 5-10 years... to the detriment of everyone but the "top execs" who'll be bailed out?

My impression after reading "Too Big To Fail" -- which, BTW is an amazingly well-written book[1] -- is that "they" will probably get away with all this confusion and obfuscation... right?

I really do want to learn at least a little bit, but it seems like such an impenetrable world of concepts, and I really do want to avoid the "news-based" or even "journalist-based" approach to learning about this subculture. (When a Dartboard fares better that your average journalist/investor-proxy, you know you have a gambling problem.)

[1] Not sure how accurate it is, but it's really well-written and exciting. Unfortunately, it doesn't delve that much into the technical concepts in Finance :(, though it does mention LIBOR at least once.

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