Fresh From Prison, Tom Hayes Stirs Up Debate About Libor’s Adequacy

He’s certainly an expert on Libor, but Tom Hayes’ assertion that the benchmark he rigged is now cleaned up and fit to stay is coming under fire.

Claims by the ex-UBS Group AG and Citigroup Inc. trader -- who was convicted for manipulating the London interbank offered rate in 2015 -- ignore the shortage of genuine trading data available to underpin it, bankers and analysts say.

The gauge underpins hundreds of trillions of dollars of financial assets and is being phased out by regulators worldwide. Speaking days after he was released from prison, Hayes said there is no need for the cost and hassle of replacing Libor and that benchmark he helped plunge into scandal has been successfully reformed.

Fresh From Prison, Tom Hayes Stirs Up Debate About Libor’s Adequacy

“Libor is fundamentally flawed. Banks just don’t fund themselves in the short-term money markets in the same way that they used to,” said Marcus Burnett, director of SOFR Academy, an education technology firm whose clients include banks and asset managers. “There was one day in March where there were zero transactions underpinning the calculation of sterling Libor, leaving it entirely reliant on ‘expert judgment.’”

Hayes’s comments underscore wider questions about whether regulators could have chosen to keep reforming Libor, as they have done with its European peer Euribor, rather than lumbering banks with the Herculean task of cleansing the benchmark from their systems.

Major banks have set up whole teams to overhaul their internal systems and scrutinize and renegotiate Libor-linked contracts before the rate ends. Some firms are spending hundreds of millions of dollars each on the transition, Burnett said. Many Libors will likely retire at year-end, while key dollar tenors could live on until mid-2023.

While Hayes’ colorful case captured the public imagination, a bigger problem was the way underlying trading data had already dried up. Since the scandal, Libor has been reformed, with a so-called “waterfall methodology,” which deploys banks’ transaction-based data where available. When that’s lacking, the process moves onto information “derived” from transactions, before entering a less exact world where banks use “expert judgment” to come up with the numbers. In reality, this final category can play a major role.

That’s not to say the waterfall approach is out of fashion. A similar technique is used to create Euribor, a rate that was also damaged by manipulation scandals and which is pegged to 180 trillion euros ($216 trillion) of financial assets. Unlike Libor, Euribor is expected to live on indefinitely. Libor administrator the ICE Benchmark Administration Ltd. is also using a comparable methodology to build term reference rates for the Sterling Overnight Index Average, the main U.K. Libor replacement.

For Hayes, there’s little cause for concern around the benchmark. “All they’ve done is put it behind a firewall and removed all the commercial influence. So why do you even bother replacing it with secured overnight funding rates, stuff like that -- just seems to me a lot of work when you’ve got it fixed,” he said in an interview.

For some in the market, reforms will never be enough. Christoph Rieger, head of its fixed-rate strategy at Commerzbank AG, says Euribor should have been scrapped like Libor.

“I cannot give you many good reasons why Libor should be kept,” he said. “ICE also introduced a hybrid methodology, but this was no reason to keep the life-support measures on for longer than what is needed for an orderly transition.”

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