Who Fix Rates for Gold, Currencies, and Libor

LIBOR's Influence Today

The benchmarks of interest rates for currencies and gold are fixed by a selected group of people in London. London Interbank Offered Rate, commonly known as LIBOR, is a benchmark rate that is frequently used for billions of dollars when dealing in swaps or loans. This short term rate represents the fund cost for major banks in London. The British Bankers’ Association was responsible for the administration of LIBOR before February 2014. It was a duty of the association to review the panel of more than twelve banks every day and every bank that participated was required to follow a certain criteria on which its LIBOR submissions were based.

In the forex market, benchmark foreign exchange rate that is fixed at 4 p.m. in London is known as the closing currency fix. They are also called Reuters benchmark rates or WM benchmark rates, and are set on the basis of actual trade conducted by forex traders in the interbank market during one minute window. The benchmark rates of twenty one other currencies are also determined on the basis of trades executed during these sixty seconds.

Bank of Nova Scotia, Barclays, Deutsche Bank AG, Societe Generale and HSBC Holdings are the five banks that are responsible to fix the gold price. It is determined twice in 24 hours. The whole process of fixing a gold price is executed by these banks through teleconference with the chairman where opening price is announced to other members. These four members then communicate this to all the customers. The gold bars were subsequently traded at a determined price based on customers’ orders and their trades. The price of gold is then adjusted until it balances the demand and supply of gold.

How did it all start?

The rate of Gold and LIBOR were critically observed after the two major bearish markets of the past decade. By the end of each bear market, key market players and regulators showed a great appetite to introduce new policies to break the repeated cycle of boom and bust. We are well aware of the accounting irregularities back in early 2000 to 2002 that led to the establishment of Sarbanes-Oxley legislation. The reason behind introducing this legislation was to improve the corporate governance.

The bear market of 2008 and 2009 caused financial institutions to take a great amount of risk, which came under the highlights. Regulatory authorities took serious notice of this issue and critically examined it. The reason behind this critical evaluation was to highlight and eradicate the malpractices of fixing the currency rate, the rate of interest and gold prices by banks and other financial institutions.

Why did banks and financial institutions manipulate the benchmark rate? The answer to this is simple. It was done to increase profits and to understate the actual stress level that certain banks were under during the period of credit crunch from 2007 to 2009. The banks intentionally reduced their LIBOR submissions to show the general public that the parties associated with these banks had a high level of confidence in them, which was not true.

Measures to Avoid these Actions

In order to avoid such situations, following actions were taken with the help of which these issues can now be avoided in the future:

Benchmark Rates Administered by Independent Bodies – Business professor, Rosa Abrantes-Metz, and her husband published a research report that discussed the problem of fixing LIBOR and Gold prices. In early 2014, she said in an article in the Financial Times that the benchmark should be defined on the basis of actual trades and should be administered by independent bodies that have no direct interest in the benchmark rates.

From February 2014, the administration of LIBOR is now done by IBA (Intercontinental Exchange Benchmark Administration) where the integrity of the rate is ensured.

Strong Regulatory Framework – There were many concerns in the scandal of currencies and LIBOR fix. All these scandals were uncovered by journalists and researchers. LIBOR-fixing scandal came to limelight in 2008, whereas, Forex fixing scandal was reported by Bloomberg report in 2013. The same pattern is arising once again, as the research paper drafted by Rosa Abrantes-Metz and her husband in February 2014 showed unusual trading trends. However, these anomalies will require better and more effective regulations to prevent these issues in the future.