Understanding the construction

and operation of BBA LIBOR

strengthening for the future
a consultative paper from the bba 10 June 2008

Executive summary LIBOR (the London Interbank Offered Rate) is the most widely
referenced interest rate index in the world. It is set at 11am UK time in
10 currencies and for several maturities. LIBOR is owned by the BBA,
the data compilation and calculation is undertaken by Reuters for the
BBA and the process is overseen by an independent committee of
market participants, the Foreign Exchange and Money Market
Committee.
In this current historically difficult period for credit markets, liquidity and
credit premia have risen very significantly since August 2007. LIBOR is
a benchmark representing the rate at which contributor banks perceive
they could raise unsecured funds depending on a number of factors.
LIBOR panel banks, for example, are invariably those with the best credit
ratings and in the current diminished credit capacity of the market it is
therefore not surprising that some institutions will not be able to access
funds at the LIBOR rate.
The four major LIBOR currencies are US Dollar, Sterling, Euro and Yen,
but the recent commentary has been primarily in respect of Dollar
LIBOR. Whist some institutions (primarily European) consider that the
current US Dollar LIBOR fix can be too low, others (primarily US)
consider it can be too high. However, like the other LIBOR currencies,
US Dollar LIBOR is a benchmark set by panel banks in the London
market; it is the rate for the Euro Dollar, not the domestic US Dollar; and
not only are participants in this market extremely risk averse, but there is
also a relative shortage of US Dollar funding in European markets.
This paper Understanding the Construction and Operation of BBA
LIBOR Strengthening for the Future explains in some detail how
LIBOR is set and emphasises that it is a benchmark for cash and is not a
derivative or FX benchmark. It also gives some insight into the panel
selection process, explaining that any bank with significant business in
the relevant currency in the UK market can apply to join the panels.
There have, though, been no new applications from banks over the last
12 months who are not currently on the selection lists. Those who move
from the selection list to a panel do so because of the volume of the
relevant business that they undertake in London.
The BBA is grateful for the input from the public and private sectors in
the preparation of this paper.
Strengthening LIBOR for the future includes taking a number of steps.
As of now, the BBA is strengthening the governance by the
Foreign Exchange and Money Market Committee to incorporate a
tight scrutiny mechanism that will require any contribution
discrepancies to be reviewed and justified.
The membership of the Committee is being widened to include
non contributing banks from Europe, the USA and elsewhere as
relevant. Arrangements are also being put in place to invite
interested parties from the public and private sectors to provide
ongoing commentary and opinion into the process.
 In addition, although the current currency panels capture a very
large majority of the activity that takes place in the London
markets (and indirectly elsewhere in Europe) and there have not
been any new banks asking to participate, discussions have
commenced with a number of other US and EU banks for the
purpose of establishing whether their business qualifies for
inclusion on the relevant panels. It is important to note that any
bank may volunteer to join the BBA LIBOR panel for any
currency. Similar discussions will need to take place with banks
from other major LIBOR currency countries. This may well result
in panel sizes being increased but there will be no changes
without clear rationale. Again this work will be done in close
dialogue with interested parties from the public and private
sectors.
Transparency has long been one of the key attractions of LIBOR.
Other indices either keep their contributors confidential (H15) or
the bank is asked to contribute the rate at which it considers a
hypothetical bank would borrow (EURIBOR). LIBOR contributors
on the other hand provide the rate at which they believe they
could borrow should they propose so to do. The issue has been
raised as to whether this has the potential to stigmatise
contributions and therefore the BBA proposes to explore options
for avoiding any stigma whilst maintaining transparency.
Whilst this paper sets out predominantly the steps that are
already being taken in respect of LIBOR there are three questions
on which specific comments are sought.
1. Whether in addition to the 11am fix of US Dollar LIBOR
there is demand for another London fix later in the day
after the US market has opened. Hitherto market
participants on the Committee have suggested that this
would raise considerable legal issues in respect of
contract currently linked specifically to the 11am fixings,
as well as cause confusion, particularly in standardised
netting contracts. Nevertheless, but comments would be
appreciated from all others who hold a view.
2. Whilst the majority of Euro Dollar trading takes place in
London, the BBA will investigate demand for the creation
of an additional European Dollar index that seeks to
capture US Dollar trading in Europe.
3. Whether the description reasonable market size would
benefit from being more specifically defined.
This paper represents the views of the Foreign Exchange and Money
Markets Committee, many other members of the BBA and incorporates
the overwhelming number of informed comments that the BBA has
received. As the BBA takes the steps outlined in the paper, the receipt of
any further comments from market participants and interested parties is
welcomed.
1. Introduction 1.1 BBA LIBOR is by far the most widely referenced interest rate
index in the world. Its importance goes beyond that of inter bank lending
and touches everyone from large international conglomerates to small
borrowers. It is central in interest rate swaps and the great majority of
floating rate securities and loans relate to LIBOR. Independent research
indicates that around $350 trillion of swaps and $10 trillion of loans are
indexed to BBA LIBOR. It is the basis for settlement of interest rate
contracts on the worlds major futures and options exchanges. It is
written into standard derivative and loan documentation such as the
ISDA terms and is also used for an increasing range of retail products.
1.2 LIBOR is owned by the BBA which is a not for profit organisation
funded primarily by subscriptions from its voluntary members. The data
for the LIBOR fixes is compiled and calculated by Reuters for the BBA.
The contributing banks for each LIBOR currency are selected on
objective criteria and may or may not be members of the BBA. Those
who are members they pay an annual standard subscription to the
Association. There is no levy charged for any bank which contributes to
or participates in the LIBOR fix.
1.3 LIBOR has an unbroken back-history stretching back to 1985 and
it has enjoyed an enviable reputation since its inception.

CONSTRUCTION AND OPERATION

2.1 In the particularly benign conditions for credit markets over the
2. Impact of the Credit last decade, insufficient attention may have been paid by certain parties
Crunch on the Credit to funding liquidity risk and counterparty risk. In this context, funding
Markets liquidity risk is the chance that a lender may be unable to raise funds as
expected as liabilities fall due. Counterparty risk is the chance that the
party who borrowed the money may not be able to repay as agreed.
2.2 LIBOR is a benchmark. However some entities appear to have
made the assumption that LIBOR is a rate at which all could borrow. The
current stresses in the credit markets, as a consequence of the global
liquidity crisis, have impacted banks and other lending institutions.
Furthermore, the net flows of funds which were from cash rich institutions
such as money market funds and mutual funds have been impacted
significantly. Not surprisingly, in the very different circumstances that
prevail today, the benchmark nature of LIBOR has again become much
more apparent.
2.3 Since its inception in 1985, BBA LIBOR has enjoyed a reputation
for accuracy. However, just as the credit crunch has led to stress in the
markets, and the breakdown of longstanding correlations in the pricing of
assets, as a barometer of these markets, it has also been stressed.
2.4 This has led to discussion of some of the BBA LIBOR currency
fixes - particularly the Dollar fix - within the financial community. This
proper discussion has overflowed into commentary in the media, and the
BBA believes that it needs to correct a number of misunderstandings and
misperceptions.

3.1 BBA LIBOR is set for 10 different currencies at 11am London

3. What is BBA LIBOR time each day. The BBA conducts an annual survey of those banks
and how is it set? willing to participate, to determine which banks are active in the London
market in the relevant currencies and in reasonable amounts. From this
survey a panel of banks is created (see section 8 below and appendix 1).
However, it is not uncommon for there to be a well known bank which
has a significant presence in its own country but is not active in the
relevant currency in the London market and so is not on that panel.
 3.2 The processes are overseen by an Independent Committee, the
Foreign Exchange & Money Market Committee. (FX & MM)
3.3 The data compilation is undertaken by Reuters, on behalf of the
BBA. For each currency and maturity, contributor banks submit to
Reuters the rate at which a contributing bank believes it could borrow
funds should it wish to do so, by asking for and then accepting inter bank
offers in a reasonable market size just prior to the fix time, which is 11am
London time. Submitted rates are trimmed to screen out high or low
rates and then the average calculated. The trimming process removes
outlying data as well as preventing any individual bank from attempting to
influence the rates.
3.4 The 10 currencies are Australian Dollars, Canadian Dollars,
Danish Krone, Euro, New Zealand Dollars, UK Pounds Sterling, Swedish
Krona, Swiss Francs, US Dollars, Yen. The 4 currencies in which there is
most interest are Sterling, US Dollars, Euro and Japanese Yen.

4.1 All financial indices, rates, correlations and rules are currently
4. Review of LIBOR subject to scrutiny in current market conditions and BBA LIBOR is no
different in that respect. As a result the review addresses the current
practices and procedures, has examined the external commentary, and
has strengthened the ongoing dialogue with interested parties in the
public and private sectors. A review of this nature is comprehensive, in
order to reinforce the validity of BBA LIBOR.
4.2 A wide range of stakeholders have been consulted and their
views contributed to this review. These include: banks both on the
contributor panels and non contributing banks; several brokers; major
derivative exchanges; other financial trade associations; hedge funds;
money market funds and other asset managers; and other interested
parties in the public sector. Stakeholders have emphasised the following
points:
That extensive care must be taken in considering any
changes as BBA LIBOR now supports a swap market
estimated at $350tn and a loan market estimated at
$10tn.
Any changes must take into account the effect on
these markets, which may extend to contracts
stretching for decades into the future.
Although current discussions centre on US Dollar
LIBOR, the methodology of the rates should be
transferable, therefore any change to the calculation
of one currency should be considered in the wider
context of the suite of 10 BBA LIBOR currency
calculations and particularly the 4 principal
currencies of Dollar, Sterling, Euro and Yen.
4.3 It is the intention to continue to discuss the outcome of the review
with all stakeholders for their further comment.

5.1 US Dollar LIBOR is regarded as a benchmark rate at which non-

5. What is US Dollar domestic Dollars can be borrowed and there are 16 contributor banks as
LIBOR? set out in appendix 1. The dispersion of rates input by each bank is
reflective of the credit conditions facing each bank on a daily basis. For
several years therefore the spread between the highest and lowest has
been tight as the credit environment was benign. An increase in
dispersion rates has occurred since August 2007 as a consequence both
of the greater credit costs in the bank market since the start of the credit
crunch and the lack of liquidity.
 5.2 If a non-contributing bank cannot borrow at BBA LIBOR that does
not mean the rates are inaccurate as:-
Liquidity and credit premia have risen very significantly since
August 2007; and
The selection process will inevitably pick those banks with the
best credit ratings.
The current diminished credit capacity of the market may mean
that liquidity providers are unwilling to lend
5.3 It is thus not surprising that some institutions will not be able to
access funds at the dollar LIBOR rate in the current extremely risk
averse market conditions at the US Dollar LIBOR rate.

6.1 There are differences between US Dollar LIBOR and other

6. Comparing US indices such as the Overnight Index Swap (OIS) rate or the Fed Term
Dollar LIBOR with Auction Facility rate (TAF) auction as they are measuring different things
other indicators using different methods.
6.2 The OIS is a short-term interest rate swap where one side pays
an overnight rate, compounded over the tenor of the swap while the
other side pays a fixed rated. The Fed Effective Rate is the benchmark
for OIS and is a domestic overnight rate. The gap between Libor and an
OIS swap of the same tenor is often viewed as a measure of short-term
risk premia -the bigger the gap, the greater the perceived risk.
6.3 It should be noted that an OIS is not a cash instrument; it is a
derivative that settles against the overnight interest rate. As such, OIS
rates contain no premia for liquidity and credit risk, which are currently
significant factors in the cost of borrowing cash for longer than overnight.
LIBOR, as a cash rate does reflect these factors.
6.4 The TAF allows financial institutions to make bids for term
borrowing from the Fed, with maturities typically of 28 days. The Board
of Governors sets the auction amount and the minimum bid allowed for
the interest rate, which is set equal to the OIS rate corresponding to the
term of the loan. The interest rate on the loans is determined in a single-
price auction and is reported as the TAF rate. The TAF is a rate for
secured cash, unlike BBA LIBOR which is for unsecured funds.
6.5 Each TAF auction:
Has a finite amount of funds;
Is open to a very wide pool of potential takers;
Therefore the market where necessary will pay up for access to
the facility.
6.6 Euro Dollar Deposit - During 2008, 3 month US Dollar LIBOR
has consistently been within the range of traded Euro Dollar deposit
levels as measured by Bloombergs Euro Dollar deposit composite. This
tracks levels over the markets 24 hour trading day. (This indicates that
the LIBOR rate is a good match with trading data.)
6.7 H15 is the yield in the three month Euro Dollar deposit rate
published daily by the Fed. The Feds measure of USD Euro Dollar rates
is based on the yield observed within the Euro Dollar deposit market and
the H15 values had tended to be at the high end of the traded range.
LIBOR however, has oscillated between the high end and low end as
market conditions have shifted and the panel represents a collection of
banks with better than average funding.
 6.8 Other issues worthy of mention are that:
Credit crunch effects have ebbed and flowed on several
occasions during the past months which in turn impacts the
LIBOR fix as it does other indicators;
The banks who contribute to Dollar LIBOR have been impacted
in various ways including significant credit losses
That the contributing banks remain highly rated by Moodys, S&P
and Fitch.
6.9 These issues relating directly to the current environment will
inevitably result in a volatility that is today more than that experienced in
benign conditions.
6.10 When examining the rates at which banks will lend to each other,
it is worth noting that in general, a bank will lend to any bank with which
they have agreed a line of credit. If there is no agreed line of credit,
banks may not lend to each other at that rate or any other rate.

7. Cost of Funds
7.1 It must be remembered that LIBOR is a pure cash fixing. It is not
Effect of Foreign
derived from derivative strip fixings or FX swap rates. In illiquid and
Exchange Arbitrage
difficult markets aberrations will occur which, under more normal market
on BBA LIBOR
circumstances, would be arbitraged out. Because of the illiquidity of
markets and the wide range of credits bidding for actual funds of differing
amounts in different currencies, market forces have not acted as they
technically should in a purist, off balance sheet trading environment.
7.2 FX swaps are used extensively by banks to fund positions in
currencies where they may not have a natural underlying source of
funds. For example a European bank may have a predominantly US
Dollar denominated securities portfolio but have a main funding currency
of Euros derived from its customer base.
7.3 LIBOR is fixed at where contributor banks perceive that they can
raise funds for the nominated currencies for the period quoted at or
around 11.00 am. The rate is set on a currency by currency basis, and
without reference to each other. This is particularly pertinent when one
considers the potentially distorting effect of the forward foreign exchange
markets. In the current environment it appears possible to raise US
Dollars at LIBOR flat and swap these into Euros at considerably less
than the Euro LIBOR equivalent. Conversely, of course, a bank that is
looking to raise US Dollars by selling Euros will find the costs of these
funds extremely expensive. The argument is sometimes made that the
US Dollar fixing MUST be too low, otherwise there is apparent arbitrage.
7.4 This is in fact not correct. It is simply that the market is no longer
offering a cost free arbitrage between the FX swap and cash
transactions. Many banks may have ample access to Euros or other non-
US Dollar cash liquidity, but have limited access to natural US Dollar
cash liquidity, combined with a high demand for term US Dollar funding
for their US Dollar assets. With cash markets being significantly less
liquid and more tiered at the current time, many such banks are finding
that their direct US Dollar interbank market access is far more limited, so
they are often only able to source US Dollar funding via the FX swap. At
the same time, with the general pressure on banks balance sheets at the
moment, many US Dollar rich institutions are not only reluctant to lend
term US Dollar interbank cash and are also far less likely to swap US
Dollar into other currencies in order to take advantage of an arbitrage
opportunity. Together these structural market factors are creating a large
imbalance of supply and demand in the FX swap and cash markets, with
arbitrage actions to counter this imbalance only being brought into play
when the margins are far larger than had historically been the case in
more benign times.
 7.5 It is these market dynamics that have removed the historic risk
free arbitrage between US Dollar LIBOR and US Dollar funding sourced
via another currency using the FX swap. Many banks are seeking US
Dollars, as this is the currency in which many assets held globally are
denominated. The demand for Dollars has increased, and that means
there is currently a premium for Dollars in the FX markets.
7.6 Cash is priced at the rate that it is perceived to be available in its
natural currency at the quoting time. The contributing banks are
continuing to fix LIBOR at the rate their cash desks perceive they can
raise cash in the specified currency. The 16 names in the US Dollar
LIBOR panel are all internationally known and generally have the best
access to wholesale market funds at the time of the fixing in the market
and hence will be able to source US Dollar cash at lower levels than
some other banks.

STRENGTHENING FOR THE FUTURE

8. The Composition of 8.1 Currently, the contributing panels for each currency for which
BBA LIBOR Panels BBA LIBOR offers a rate consist of 8, 12 or 16 banks (please see
Appendix I).
8.2 Addressing the US Dollar panel in particular:
It already consists of many of the largest banks in both
Europe and the USA.
These banks are not European British or American: they
are all global institutions.
The three largest banks in the USA are already panel
members.
HSBC and Royal Bank of Scotland are in the top 10 largest
banks in the US.
Many of the US Dollar panel hold American banking licences
and are quoted on the New York Stock Exchange.
8.3 It is important to note that any bank may volunteer to join the
BBA LIBOR panel for any currency. In order to apply, banks must
submit in confidence the total of their interbank lending activity and swap
activity carried out in London. It is clear that the activity must be London
based for US Dollars, as US Dollar LIBOR is the rate for Euro Dollars not
US domestic trading and London is the largest centre for trading in this
instrument. Increasing the number of contributing banks on the US Dollar
LIBOR panel by the addition of more banks either from continental
Europe or the USA is possible provided those banks trade in significant
amounts in US Dollars in London. The sixteen banks currently on the
panel represent a substantial majority of the transaction volumes in the
London market reported to the BBA. The BBA is not aware of any
sizeable players in the London market that do not contribute to the BBA
LIBOR panels. The rates therefore capture the overwhelming majority of
such trading and the effect of widening the panel may not be that
significant.
8.4 Care and clarity is also required in the addition of any banks to
any of the BBA LIBOR panels because BBA LIBOR is designed to
represent a benchmark funding cost which may not be available to all
institutions. It would not be beneficial for the markets for a benchmark to
include banks that did not undertake a significant volume of trading in
London because this could have the effect of distorting the benchmark
and reducing its credibility.
 8.5 It is true that the cost of US Dollars changes over the day,
changing as each financial centre opens and deepens the pool of
liquidity. However US Dollar LIBOR is not and never has been a
domestic funding rate. A rate that showed the cost of US Dollars traded
in New York could be materially different, and a rate that included a mix
of both London and New York trading could therefore be construed as an
inappropriate benchmark that would not be replicable, as the choice of
where to deal is between discrete locations with different characteristics.
8.6 Prior to the credit crunch, credit was priced cheaply supply
exceeded demand. However at the moment this is not the case and the
effect is clearly visible in LIBOR as a measure of the markets.
8.7 Differences between London Euro Dollar rate and domestic US
Dollar rates are a reflection of existing market conditions, not
necessarily a distortion in benchmarks.

9.1 BBA LIBOR is fixed at 11.00 am London time. This represents

9. Timing of the Quote
the most convenient time for users worldwide, given that the fixing is for
10 currencies globally and therefore cannot happen at a time when all
markets are open. It also gives institutions operating in Europe and the
USA, who make up the majority of the global financial system, time to
clear and settle any trades linked to the rates before the close of
business in Europe.
9.2 Although it is possible to have multiple fixings for each currency,
or even a continuous real time rate for each currency, different fixing
times for each currency would mean that the rates are not comparable as
market moving events would occur between the setting of BBA LIBOR
for one currency and another.
Offering multiple fixings at different times within each currency
would lead to market confusion, and all outstanding deals linked
to BBA LIBOR would need to be re-visited to define which time
should be used as the benchmark. The complexity and expense
of such an operation is clearly evident.
A real time BBA LIBOR calculated 24 hours a day would
theoretically be the most accurate measure of the markets, but as
a benchmark this methodology suffers from the same critical
drawback as multiple fixings at different times for each currency.
A single snapshot time or close point would still have to be
chosen for all deals linked to BBA LIBOR.
9.3 The consensus view from all stakeholders in the rates is that
there must be one fixing for all currencies at one point each day. It is also
vitally important to the derivatives market that the fixings all take place on
the same basis and that includes timing.
9.4 However the BBA will be seeking market views on the
creation of two additional Dollar benchmark fixes.
i) Whether there should be an additional second US Dollar
fix after the US market opens and;
ii) Whether there is a desire to create an additional US Dollar
index that seeks to capture European US Dollar trading.

10. Use of a Median 10.1 Currently rates are created by ranking the contributors, discarding
Rather than a the top and bottom quartiles and then averaging the 2 central quartiles.
Trimmed Mean It is therefore difficult to influence the rates as any submitted rate that is
far enough away from the average to move the fixing materially will be
discarded. Analysis indicates that the effect of moving to a median is
 less than 1 basis point in major currencies and less than 2 in smaller
currencies. The FX & MM Committee therefore recommended no
change to the current trimmed mean methodology.

11. Anonymising the 11.1 It has been suggested that the transparency of LIBOR may be
Rates resulting in contributors exhibiting herd behaviour, as in the current
strained market, which is characterised by funding costs out of line with
the market, invites speculation and rumour mongering in the media. A
solution to this might be to anonymise contributions, by ceasing to
publish the underlying inputs from contributing banks freeing them to
publish a rate without fear of this attracting attention. The majority of the
market participants contacted by the BBA and the FX & MM Committee
believe this would be a retrograde step. Relevant authorities have also
expressed support for transparency and the strength and popularity of
BBA LIBOR stem from its fundamental transparency and accountability.
11.2 However the BBA will explore options for avoiding stigma
whilst maintaining transparency.

12. Clarifications to
12.1 There is confusion amongst market commentators about what
the definition of
BBA LIBOR is for, and how it is constructed. This is a serious issue and,
BBA LIBOR
therefore, the need to clarify the definition is evident both for users and
observers in order that they understand fully the information that is being
presented.
12.2 Currently the definition is the rate at which an individual
Contributor Panel bank could borrow funds, were it to do so by
asking for and then accepting inter-bank offers in reasonable
market size, just prior to 11.00 London time. This definition is
amplified as follows:-
The rate at which each bank submits must be formed from
that banks perception of its cost of funds in the interbank
market.
Panel banks are asked for their own rates, rather than the
rate at which a hypothetical bank could borrow, which is the
definition used by some other fixes.
Until 1998 BBA LIBOR used such a methodology, referring to
the rate at which a prime banks lent to one another. The
reason for changing this is that it is not possible to define
what a prime bank is and all other definitions using unnamed
subjects will suffer from this same problem
The fixings must represent rates formed in London and not
elsewhere.
They must also be for the currency concerned, not the cost of
producing one currency by borrowing in another currency and
accessing the required currency via the foreign exchange
markets. (As is stated earlier in the section on foreign
exchange arbitrage and BBA LIBOR rates.)
The rates must be submitted by members of staff at a bank
with primary responsibility for management of a banks cash,
rather than a banks derivative book.
12.3 One area in the BBA LIBOR description that is not specifically
defined is Reasonable Market Size. This is intentional, as reasonable
market size will vary according to prevailing liquidity and credit conditions
as well as between currencies and even quoting banks. In the current
conditions, this could change weekly or even daily. Specific figures could
be written into the instructions to contributing banks, but this could lead
to confusion and uncertainty and might even impair liquidity further.
 From our discussions to date, it would appear that reasonable market
size is a concept that is understood by all market participants.
12.4 However, the BBA seeks further comments on this point.
12.5 The definition includes the expression funds. Hitherto, this
expression has never been explained. The BBA and the FX & MM
Committee, in response to requests, now wish to clarify what the
definition of funds covers. That is, that the definition of funds is:
unsecured interbank cash or cash raised through primary issuance of
interbank Certificates of Deposit.

(i) Objectives of the Strengthening Exercise

13. Strengthening the
governance of 13.1 The BBA believes that the objectives/principles for a
BBA LIBOR strengthened governance framework include:
(a) A need for enhanced transparency and accountability;
(b) More clarity over the scrutiny mechanism;
(c) Greater market participation in the processes and oversight of
BBA LIBOR;
(d) Reinforced market confidence in BBA LIBOR as a credible
benchmark; and
(e) Improving the BBAs educational outreach on BBA LIBOR
The BBA invites comments on this initial list.
13.2 The BBA has discussed with the FX & MM Committee and other
interested parties (including our legal counsel) on how these objectives
could be met. The first steps, on how the BBA and the Committee intend
to proceed, are as follows:
(ii) Scrutiny mechanism for BBA LIBOR
13.3 In revising the scrutiny mechanism for BBA LIBOR, The BBA
believes that the following key aspects are essential and are being
implemented forthwith:
1. Banks inputs into the BBA LIBOR process will be actively
monitored every day and discrepancies within rates will be
flagged. Discrepancies will include inputs that fluctuate, alter
rapidly without any obvious external cause, or are not consistent
with their market activity in the relevant period.
2. Where discrepancies are identified, these will be brought to the
attention of the FX & MM Committee for their consideration.
3. All members of this committee will be experienced market
practitioners
4. If the members of the Committee cannot satisfy themselves that
any given rate is realistic, the submitting bank in question will be
invited to explain the reason for the rate they posted including
third party independent analysis if required.
5. A bank that is unable to offer a justification for their rates at any
point will be given a warning and repeat offences will lead to
replacement of the bank on the currency panel in question.
6. The Committee will meet at least monthly at which it will receive a
full report on these and any other issues brought to its attention
by the LIBOR manager. This will include assessment of
commentary in the market and from all stakeholders.
7. The Committee will develop best practice for bank reporting
standards and adherence to these standards.
 This list may be by no means exhaustive, and the BBA would
welcome comments on whether there might be other aspects to
take into account.
(iii) Membership of the FX & MM Committee
13.4 The BBA also suggests that the composition of the Committee
needs to be reviewed, and that certain aspects such as method or
appointment and term of office could benefit from further clarity.
Members of the Committee are currently from contributing banks, and
believe their independent stance and ability to provide detailed scrutiny
of the rates would be strengthened by widening the membership of the
Committee. The Committee will ensure ongoing dialogue with relevant
central banks, and other interested groups and organisations. The BBA
suggests that this could be initiated with immediate effect.
The membership of the Committee is being widened to include non-
contributing banks in Europe and the USA and the BBA would
welcome comments on this.
(iv) Expansion of Contributing Panels.
13.5 The BBA believes that the current currency panels are a good
representation of transactional activity in the London markets. The first
criterion for panel membership is an application to be considered for
inclusion in one or more of the panels. The BBA has not had any new
applications for banks from banks wishing to be considered for addition
to the panels in the last year. Notwithstanding this, the BBA believes that
the issue of whether the full range of institutions is being captured should
be explored once again.
The BBA will therefore actively commence discussions with a
number of other major banks for the purpose of establishing
whether their business qualifies for inclusion on a panel and
whether the panel sizes should be increased.
13.6 The BBA will commence this immediately, but this is necessarily
a process that will take a certain amount of time. The BBA will keep the
markets fully abreast of progress and will seek the views of all interested
parties in the public and private sectors. The BBA, FX & MM Committee
and contributors are all determined to reinforce the validity and credibility
of LIBOR.
(v) Ongoing dialogue regarding BBA LIBOR
13.7 It is clear that BBA LIBOR is not perfectly understood by market
participants and observers, and that the BBA could do more to educate
markets and other interlocutors including the media. The BBA has
contacted all contributors to ensure that their submissions to the rate
setting process are fully compliant with the procedures as laid out by the
FX & MM Committee. The BBA will also hold meetings with all interested
market participants in respect of the content of this paper and seek their
views.
13.8 Mindful of the widespread use of LIBOR, in terms of
significant numbers of contracts around the world being linked to
BBA LIBOR in its current form, the BBA intends to proceed
carefully. There will be no knee jerk change and no alterations
without clear rationale.

14. Conclusion 14.1 BBA LIBOR is calculated and fixed by Reuters under contract
from the BBA, and under the guidance of the Foreign Exchange and
Money Markets Committee. This paper represents the view of this
Committee. Comments from market participants and users of the rates
are welcome, and should be directed to John Ewan, LIBOR Director at
the BBA and the Secretary to the Committee, within four weeks of the
date of release of this paper.
14.2 Upon receipt of comments, the BBA will inform the market of the
results of the consultation and establish a timetable for the
implementation of outstanding issues.

British Bankers Association

10 June 2008
APPENDIX I Contributor Panel Banks

AUSTRALIAN DOLLAR (AUD) 8 BANKS

Barclays Bank plc
Commonwealth Bank of Australia
Deutsche Bank AG
HBOS
Lloyds TSB Bank plc
National Australia Bank Ltd
The Royal Bank of Scotland Group
UBS AG
CANADIAN DOLLAR (CAD) 12 BANKS
Bank of Montreal
Barclays Bank plc
Canadian Imperial Bank of Commerce
Deutsche Bank AG
HSBC
HBOS
JP Morgan Chase
Lloyds TSB Bank plc
National Bank of Canada
Rabobank
Royal Bank of Canada
The Royal Bank of Scotland Group
SWISS FRANC (CHF) 12 BANKS
Barclays Bank plc
Bank of Tokyo Mitsubishi UFJ
Citibank NA
Credit Suisse
Deutsche Bank AG
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Socit Gnrale
The Royal Bank of Scotland Group
UBS AG
West LB AG
DANISH KRONE (DKK) 8 BANKS
Barclays Bank plc
Deutsche Bank AG
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
The Royal Bank of Scotland Group
UBS AG
EURO (EUR) 16 BANKS
Bank of America
Barclays Bank plc
Bank of Tokyo Mitsubishi UFJ
Citibank NA
Credit Suisse
Deutsche Bank AG
HBOS
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
Socit Gnrale
The Royal Bank of Scotland Group
UBS AG
West LB AG
STERLING (GBP) 16 BANKS
Abbey National plc
Bank of America
Bank of Tokyo Mitsubishi UFJ
BNP Paribas
Barclays Bank plc
Citibank NA
Deutsche Bank AG
HBOS
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
The Royal Bank of Scotland Group
UBS AG
West LB AG
JAPANESE YEN (JPY) 16 BANKS
Bank of America
Bank of Tokyo Mitsubishi UFJ
Barclays Bank plc
Citibank NA
Deutsche Bank AG
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Mizuho Corporate Bank
Rabobank
Socit Gnrale
Sumitomo Mitsui Banking Corporation Europe Ltd (SMBCE)
The Norinchukin Bank
The Royal Bank of Scotland Group
UBS AG
West LB AG
NEW ZEALAND DOLLAR (NZD) 8 BANKS
Commonwealth Bank of Australia
Barclays Bank plc
Deutsche Bank AG
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
National Australia Bank
The Royal Bank of Scotland Group
SWEDISH KRONA (SEK) 8 BANKS
Barclays Bank
Deutsche Bank
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
The Royal Bank of Scotland Group
UBS
US DOLLAR (USD) 16 BANKS
Bank of America
Bank of Tokyo Mitsubishi UFJ
Barclays Bank plc
Citibank NA
Credit Suisse
Deutsche Bank AG
HBOS
HSBC
JP Morgan Chase
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
The Norinchukin Bank
The Royal Bank of Scotland Group
UBS AG
West LB AG