LIBOR rigging: Difference between revisions

As per the basic model, to manage their structural interest rate risk, banks ''generally'' would want LIBOR low — but deposits are not the only show in town. Banks have other exposures to the interest rate market. One notable category: [[Interest rate swap mis-selling scandal|interest rate swap]]<nowiki/>s.

{{Quote|“An individual BBA LIBOR Contributor Panel Bank will contribute '''''the rate at which it could borrow funds''''', were it to do so by asking for and then accepting inter-bank offers in reasonable market size just prior to 1100.”}}

On any day there would be a range of rates at which a bank ''could'' borrow. These might be firm offers from other lenders, good faith estimates or model outputs. There is an excellent [[subjunctive]] in there, by the way: “''were'' it to do so” implies that it need not actually do so.  

The Court of Appeal considered first a question of legal methodology: whose job was it to determine what the LIBOR Definition meant, and by reference to what?   

{{Quote|The court was not confining itself, even “principally”, to the language of the BBA Definition but was taking into account the evidence ... as to how those particular submitters arrived at their submissions in practice. ... This means ... that the question of how the LIBOR Definition was to be construed was being treated as an issue of fact for the jury.}}

The Court of Appeal disagreed. Under English law contractual interpretation is a matter of law, to be resolved by the judge. Evidence of market practice, or the belief of submitters, did not enter into it.  

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. [...] '''The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include'''. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

There is here the odd spectre of the law of [[contract]] forming the backdrop, and comprising some of the elements of a criminal allegation. This is rare. Usually, the criminal authorities stay well out of commercial disputes, even where allegations of fraud are flying around — there is a civil tort of fraud — seeing it as a matter of civil loss between merchants perfectly able to look after themselves, and not one requiring the machinery of the state.   

And the argument here is not about economic reality, but legal meaning, and legal meaning follows natural, ordinary meaning, and in the world of contractual interpretation, that is viewed from the perspective of the person performing the contract and [[Contra proferentem|against the draftsperson’s interest]], giving the benefit of the doubt to the reader.  

The same doubt, as it happens, is given to defendants in case of ambiguously framed crimes. For if the LIBOR Definition meant to sanction mandate this “obvious” outcome, it did not do a very good job of it. As a matter of plain English, “could borrow” does not rule out a higher rate, but implies it: the Court of Appeal concedes as much, at para 89:  

{{Quote|A borrower “can” always borrow at a higher rate than the lowest one on offer.}}

But — per the wording in the LIBOR definition — there is an upper bound to that, delimited by the range of “inter-bank offers in reasonable market size just prior to 1100”. A submitter could not submit a rate higher than any actually offered, any more than it could submit a rate lower than the actually offered range. That would be dishonest.