Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Friday, August 18, 2017

Collusive Benchmark Rates Fixing

Nuria Boot, German Institute for Economic Research (DIW Berlin); KU Leuven, Timo Klein, University of Amsterdam - Amsterdam School of Economics (ASE), and Maarten Pieter Schinkel, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) have an interesting paper on Collusive Benchmark Rates Fixing.

ABSTRACT: The fixing of benchmark rates such as Libor, Euribor and FX has proven vulnerable to manipulation. Individual rate-setters may have incentives to fraudulently distort their submissions. For the contributing banks to collectively agree on the direction in which to rig the rate, however, their interests need to be sufficiently aligned. In this paper we show how a continuous benchmark rates cartel could be sustained by preemptive portfolio changes. Exchange of information facilitates front running that allows members to reduce conflicts in their trading books. Designated banks then engage in eligible transactions rigging to justify their submissions. As the cartel is not able to always find stable cooperative submissions against occasional extreme exposure values, there is episodic recourse to non-cooperative quoting. The benchmarks remain vulnerable to these cartel mechanisms, also after the implementation of recent and proposed reforms. It is not obvious how to make them more resilient to collusion. Periods of heightened volatility in the rates can be indicative of collusion.

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