Losses due to Frauds (Damage to Financial Markets and Public Trust)

Reuters was the organization responsible for disseminating the benchmark interest rate on the
instruction of the British Bankers Association from the years 2003 until 2012. Martin Wheatley,
former CEO of the Financial Conduct Authority (FCA), conducted an independent review about the
scandal and recommended some reforms. Based on this, commencing in 2014, the entire LIBOR was
placed under the vigilant watch of the Intercontinental Exchange Group (ICE), which guarantees that
there is no rate manipulation. There was a prevalent presumption, due to the fact that this was a
transaction between institutions, that the rates that were presented or the forecasts of rates that were
supplied were reliable and that they were done so in good faith. There was also no reason to believe
that banks may have been working together at any moment in time to provide inaccurate projections.
This is because there was no evidence to support such a hypothesis.

The London Interbank Offered Rate (LIBOR) was susceptible to being subtly manipulated, as the
inputs were taken from the traders so as to benefit their financial position by either understating or
overstating the rates. It resulted in value losses that amount to billions of dollars. All of the traders and
financial organizations that took part in the conspiracy and provided the incorrect interest rate
estimates were eventually punished. Such consequences led to the governance being handed over to
the administration that is in charge of the ICE benchmark.

The LIBOR controversy primarily resulted in a wide range of civil lawsuits, and in order to make
certain that another incident of this kind of manipulation does not occur in the future, Financial
Conduct Authority (FCA) decided to make it a criminal offense. The FCA's authority was expanded
so that it now includes the ability to draft rules governing the participation of banks in the procedure
by which LIBOR is determined. There were sixteen different banks represented on the group, and the
Serious Fraud Office has decided to launch an investigation into those institutions in relation to the
alleged fraudulent activity that has taken place.

In the year 2012, the Federal Deposit Insurance Corporation launched a lawsuit on behalf of 38 banks
that had suffered monetary losses as a result of the rates rigging that began in 2008. These banks were
entitled to compensation for losses incurred on investments in interest-rate derivatives. As of the
month of May in 2015, the total worldwide fines imposed as a consequence of manipulating the rate
totalled to 9 billion USD.

Both the United States and the United Kingdom formulated a diverse range of claims over the past
years, when the scandal unfolded. The allegations include a violation of the competition laws,
racketeering, breaching laws, significant damages, breaching contracts, torts, and criminal
responsibility for fraud, all of which regulate the free practice of business and commerce. The doubt
was also raised over the rate setting process as a number of legal loopholes were existing and because
no banks have ever claimed that the Libor rate was reliable as it was.
Major lawsuits and settlement of claims that are to be settled by the banks were estimated to be
around $176.3 billion.

Aftermath Effect

Various cases were impacted, and the authorities in each of these cases responded to the institutions in
their own unique ways. During the period under investigation, investigations into manipulation of the
London Interbank Offered Rate (Libor) discovered manipulation of the Tokyo Interbank Offered Rate
(Tibor) and the Euro Interbank offered Rate (Euribor).

At the level of the European Union, the manipulation of Libor and Euribor was considered an
example of anti-competitive behavior. This behavior is characterized by banks creating alliances in
order to accomplish generally agreed upon anti-competitive goals. It was interpreted as an attempt to
swindle the market in the United Kingdom. However, the authorities were hampered because there
were not enough rules in place to deal with such manipulations. The manipulations were against the
law in the United States because they had an unfair impact on the commodities market in that country.

As a form of punishment for the participating banks, the pertinent authorities in each of the
jurisdictions that were involved assessed monetary penalties. Although there have not yet been any
successful criminal prosecutions, some individuals have been arrested in the United Kingdom and
may be incriminated in the future for their claimed parts in manipulating Libor. This is despite the fact
that there have not yet been any successful criminal prosecutions. The authorities in the United
Kingdom issued penalties to financial institutions on the grounds that the institutions had violated
market behaviour principles. On the other hand, in the United States, the fines were levied as a
consequence of settlements that were reached between the financial institutions and the regulatory
authorities. Later it was revealed that the Peter Johnson (LIBOR )and Colin Birmingham
(EURIBOR), who were the whistleblower’s in this scandals, were sent to the jail in UK.
Conclusion

The regulating bodies concluded that the transition from LIBOR rates would not be easy as huge
worth of financial instruments are still linked to it. Alternative benchmarking (shown above) were
considered as to avoid loopholes that were discovered during the LIBOR scandal

Alternative types of finance and benchmarking techniques started to evolve as the trust over LIBOR
was reducing. Many countries were even trying to phase out the LIBOR. As we saw, LIBOR panel
banks were frequently required to give rate quotes based on trader judgement rather than actual
transactions. Such circumstances rendered LIBOR open to manipulation. Over the last decade, the
panel banks have paid out billions of dollars in fraud-related settlements to regulators and private
plaintiffs.
In 2012, Financial Conduct Authority (FCA-UK), issued a report for seeking in significant
improvements to LIBOR. This decision marked the phase of phasing out LIBOR. The International
Organization of Securities Commissions (IOSCO) issued rules for financial benchmarks in 2013 to
increase the quality and integrity of benchmarks by ensuring that they are based on transactions
between unrelated parties in healthy markets. The Financial Stability Board accepted the IOSCO
principles in 2014 and suggested modifications to enhance LIBOR and the establishment of risk-free
rates that might serve as LIBOR substitutes. In the same year, the Federal Reserve Board and the
Federal Reserve Bank of New York (FRBNY) created the Alternative Reference Rates Committee
(ARRC) to lead these efforts in the United States. The FCA declared in 2017 that it will no longer
require or encourage banks to submit LIBOR rates beyond 2021, thereby beginning the countdown
to LIBOR's demise. The procedure would neither be quick nor simple.

In 2022, final regulation published by the Board of Governors of the Federal Reserve defined the
benchmarks that would replace LIBOR. The base rate of the new benchmark will be linked to all of
the financial instruments. LIBOR will cease to exist on June 30, 2023 making it an important
milestone in the history of U.S. financial system. This new benchmark is known as SOFR (Secured
Overnight Financing Rate). Many of the countries will be phasing out this existing practice to adopt
new alternatives.

Learnings:
As the proper monitoring policies were not developed, the rate-setting process was manipulated by
the traders through their connection with banks. Also banks were trying to show that they were
obtaining the funds at cheaper cost as compared to the true cost of borrowing. Pressure of the
regulators with the help of lawful frameworks and sight of the watchdogs would have kept them
under fear of not so easily manipulating the system and affect the billions. Although, later the
policies and punishments were designed properly.
When the scam unfolded, the regulators just punished the banks by levying the penalties and
sending the traders involved in fraud to the jail. But the scale of the profit was not recognised while
considering the punishment as the officials themselves were not aware of it

The punishments, in terms of both their abundance and their character, are not sufficient. Because
the only sanctions that were handed out were fines, they do not meet the criteria to be called
"punishments" in the conventional sense of the word. There is no assurance that the sanctions will
have any kind of a deterrent effect on the banks in terms of preventing future instances of abusing
confidence in others. At this point, the judiciary should have brought up and emphasized a much
more important problem, which is the preservation and promotion of an ethical culture in the
financial sector.
The morality of the situation is still up in the air because neither the banks nor the authorities have
publicly accepted accountability for their errors and apologized for doing so, which has left the
matter unresolved. If the institutions are tainted all the way through to their foundations, there is no
reason to permit them to continue conducting business in the same manner as before. It would not
only be the right thing to do to discipline the market, but it would also be an act that would re-
establish "ethical values" in the centre of a financial system that is otherwise unprincipled.