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“Give Me a Sign”
How the BBA Calculates and Publishes LIBOR
January 24, 2009
Trekking to Delphi. Casting Viking runes. Gazing into crystal balls. For millennia, we have sought pronouncements and signs. To gauge the future, the 21st century man—Homo Negotium—doesn’t summon the Delphic Oracle. Instead, we turn to London for our era’s daily sign: LIBOR. Forgoing clairvoyance, the British Bankers’ Association (BBA) uses cold calculation, statistical analysis and some disaster planning to provide this key index.
The BBC (not to be confused with the BBA) describes LIBOR’s elaborate and redundant workings. Every business day at the 11am hour, a team of six people in a building at Canary Wharf receive primary data from contributor banks. To guard against interruption from terrorist attack or other catastrophes, each team member has a dedicated phone line at his or her residence to maintain communication and workflow. A secret backup office with full staff exists outside London to keep LIBOR going if all else fails.
In creating LIBOR rates, the BBA consults a panel of at least eight “contributor banks.” These banks are publicly identified on the BBA Web site. The association strives to reflect the market by selecting banks that represent an appropriate range of countries and institution types. Contributor banks are ultimately chosen by reputation, activity level, and knowledge of particular currencies.
The BBA receives quotes from contributor banks for their daily interbank lending rates, the interest they will charge other banks for loans. Different rates are assigned to different short-term maturities, from overnight to one year. The higher the rate, the less assured banks are in the market; lower rates/higher confidence define the opposite trend. Since banks generally consider other banks to be the most trustworthy borrowers, changes in interbank rates affect other financial instruments as overall cost and availability of funds are built on this bedrock lending.
The BBA stipulates that contributors’ quote rates on deposits must be…
• Made in the London market in reasonable market size
• Simple and unsecured
• Governed by the laws of England and Wales
To formulate actual LIBOR rates, the BBA eliminates the top and bottom quartile of collected quotes and averages the middle two quartiles, a process known as “spot fixing.” All contributor bank rates are published to maintain transparency.
LIBOR is provided in 10 currencies…
• Pound Sterling
• US Dollar
• Japanese Yen
• Swiss Franc
• Canadian Dollar
• Australian Dollar
• Euro
• Danish Kroner
• Swedish Krona
• New Zealand Dollar
…and the most common maturities…
• Overnight LIBOR
• 1-month LIBOR
• 3-month LIBOR
• 6-month LIBOR
• 1-year LIBOR
Thomson Reuters partners with the BBA to disseminate LIBOR rates. Reuters, Thomson Financial, Bloomberg, Quick, Infotec, Class Editori, IDC, Proquote and Telekurs are among the data vendors who publish LIBOR rates from the daily announcement. Other institutional and media Web sites have licenses to post LIBOR rates at the end of the business day. Financial print media, such as The Wall Street Journal and Financial Times, publish LIBOR rates from the previous day.
“Fortune-telling” has an inescapable double meaning in finance. To get a sense of the future, the BBA has created LIBOR, a global benchmark using respected banks’ rate quotes on their lowest cost loans. This sign of the times requires figures. No glass globes. No talismans. No tea leaves—except those strained for refreshment by BBA staff on another morning compiling and broadcasting LIBOR, the world’s most important number.