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Collusive Benchmark Rates Fixing

Author

Listed:
  • Nuria Boot

    (KU Leuven, DIW Berlin)

  • Timo Klein

    (Amsterdam School of Economics, University of Amsterdam)

  • Maarten Pieter Schinkel

    (Amsterdam School of Economics and ACLE, University of Amsterdam)

Abstract

Benchmark rates, such as Libor and Euribor, are proven vulnerable to manipulation. We analyze benchmark rate collusion, which is challenging due to varying and opposing trading interests of the subset of market participants that determine the rates. Our theory is based on two mechanisms. We define front running as information sharing that allows cartel members to optimally adjust their portfolios ahead of the market. To support the joint-profit maximizing rate, designated traders engage in costly manipulation of their submissions. We find that observed episodic recourse to independent quoting is part of a feasible continuous collusion equilibrium and that all panel members would want to participate in the scheme. Our model suggests that high rate volatility may be indicative of collusion. Further protocol reforms to broaden the class of transactions eligible for submission and to average over fewer middle quotes can unintentionally facilitate collusion.

Suggested Citation

  • Nuria Boot & Timo Klein & Maarten Pieter Schinkel, 2017. "Collusive Benchmark Rates Fixing," Tinbergen Institute Discussion Papers 17-122/VII, Tinbergen Institute, revised 17 Apr 2019.
    • Handle: RePEc:tin:wpaper:20170122
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    References listed on IDEAS

    as
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    Cited by:

    1. Herrera, Rubén & Climent, Francisco & Carmona, Pedro & Momparler, Alexandre, 2022. "The manipulation of Euribor: An analysis with machine learning classification techniques," Technological Forecasting and Social Change, Elsevier, vol. 176(C).

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    More about this item

    Keywords

    Libor; benchmark rate; Libor; Euribor; IRD; banking; cartel;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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