In latest twist in Libor manipulation, hedge fund asked for rate change

In the latest twist in the investigation into the banks manipulation of Libor, the Telegraph reports that a trader at RBS claims a hedge fund asked that the bank change the interest rate.

Tan Chi Min, a former RBS trader who claims he was wrongfully dismissed by the bank after it fired him for allegedly trying to manipulate Libor - the average rate at which banks lend to each other - said he had received the request in 2007 from Brevan Howard. 

"Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg. 

The court filing alleges RBS "received this request without objection".... 

Mr Tan claimed in his filing that Scott Nygaard, head of short-term markets finance at RBS, knew about the call from Brevan Howard. However, the filing contained no further details to support his allegations. However, he is reported to have said he would provide further evidence at a later stage....  

He claims in his lawsuit that asking for changes in Libor was "common practice" among RBS traders and that the bank "took requests from clients" to alter the rate.

Regulators across the world are investigating whether banks manipulated Libor during the financial crisis. ... 

Libor is used to price about $360 trillion (£225 trillion) of financial products around the world, including everything from small business loans to complex financial derivatives. 

The rate is set from a daily survey of leading banks, which are each asked to submit their borrowing rate every morning. The survey is undertaken on behalf of the British Bankers' Association, which represents the interests of the UK banking industry.

Since it is based on a survey, Libor is subject to manipulation.

To eliminate all chance of manipulation, Libor should be based off of the actual cost to the banks to raise funds in the capital markets.  This can easily be done by requiring the banks to disclose all of their deposit liabilities.

With this data, market participants could independently calculate Libor.

The advantage of requiring the banks to disclose all of their deposit liabilities is that it lets the market participants get a clearer picture of what a bank's funding cost truly is.

Another advantage of basing Libor off of real trade data is it is consistent with what Libor is suppose to represent .... the average cost for banks to raise funds.