In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked subscribers if the London Interbank Offered Rate (Libor) quote system should be replaced with a system that uses actual overnight rates. A whopping 90% of 1,113 respondents said yes.
Do you think that the London Interbank Offered Rate quote system should be replaced with a system that uses actual overnight rates?
This strong vote is certainly a response to the ongoing Libor scandal, which has revealed that this important global benchmark of interest rates was manipulated by parties tasked with setting the rate. Thus, an objective standard, free from personal self-interest, seems preferable. Historically, one of the reasons Libor was set in a subjective fashion was that a full suite of market rates was not available each day. Although this problem will still exist in a more objective system, an agreed-upon mathematical model can probably be used to substitute for missing market rates and maintain Libor’s objectivity. A good dose of transparency wouldn’t hurt either.
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