Barometer of Fear

by Alexis; Stenfors

  Run-through: A sequence of prices or price indications provided by an interdealer broker to its clients.

  Spoofing: Submitting a manipulative buy (or sell) order with the intention of selling rather than buying (or buying rather than selling).

  Stop-loss order: An order that is triggered when a reference price reaches a certain predetermined level. A stop-loss order is designed to limit the loss on a position in a financial instrument in the event of an unfavourable price move.

  Syndicated loans: Credits granted by a group of banks to a borrower.

  Take-profit order: An order that is triggered when a reference price reaches a certain predetermined level. A take-profit order is designed to lock in profits on a position in a financial instrument in the event of a favourable price move.

  T-bill: A short-term debt security issued by a government, typically with a term of one year or less.

  Term Auction Facility (TAF): Established in December 2007, the TAF enabled banks to borrow from the Federal Reserve without using the discount window.

  Tomnext: Financial contracts with a start date tomorrow and an end date the day after tomorrow.

  Wash trade: A sale or purchase of a financial instrument where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion.2

  White hat: An ethical computer hacker.

  NOTES

  Introduction

  1Central Bank of Ireland (2009).

  2Unless specifically mentioned, I use the term ‘LIBOR’ in this book also when referring to other ‘IBORs’, such as EURIBOR, TIBOR, STIBOR, NIBOR, etc.

  3Stenfors (2013).

  4Story and Dash (2009).

  5Dominiczak (2009).

  6On 21 December 2015, the sentence was reduced to 11 years. Royal Courts of Justice (2015).

  7The Telegraph (2015).

  8Berkshire Hathaway Inc. (2002).

  9Thornton (2009).

  1. The barometer of fear

  1Spiegel (2001).

  2Bank of England (1999).

  3For a good overview of liquidity risk, see Kyle (1985) and Brunnermeier (2009).

  4Brunnermeier (2009); Khandani and Lo (2007).

  5Thornton (2009).

  6Bank of England (2007).

  2. ‘Why did you do it?’

  1Feist (2012).

  2Sandel (2012).

  3. Superheroes and beauty pageants

  1Financial Services Authority (2012a).

  2BBA (2012a).

  3JBA (2012).

  4Gyntelberg and Wooldridge (2008). The authors acknowledge that LIBOR panel banks, in theory, could act strategically in their fixing, but that the trimming process acts as a hindering factor.

  5Financial Services Authority (2012b).

  6UBS (2012).

  7Financial Services Authority (2012c).

  8Treanor (2015).

  9Financial Services Authority (2013a).

  10Financial Conduct Authority (2015).

  11Financial Services Authority (2012d).

  12Vaughan (2015c).

  13Fortado (2015).

  14Vaughan (2015b).

  15Davies (2015); Campbell (2015).

  16Financial Services Authority (2012b).

  17Mollenkamp and Whitehouse (2008).

  18Financial Services Agency (2011a; 2011b; 2011c).

  19Stenfors (2014a).

  20Keynes (1936).

  21Duffy and Nagel (1997); Ho et al. (1998); Nagel (1995; 1999); Nagel et al. (2002).

  22Güth et al. (2002).

  23Financial Services Authority (2012b).

  4. The LIBOR illusion

  1BBA (2008b).

  2Stenfors (2014a).

  3This chapter draws extensively from Stenfors and Lindo (2016).

  4ECB (2016).

  5Sarver (1990).

  6World Trade Organization (2016).

  7Higonnet (1985).

  8Higonnet (1985).

  9Einzing (1970).

  10Clendenning (1970).

  11United States Department of Justice (2012); Eaglesham and Perez (2012).

  12MacKenzie (2007).

  13Sarver (1990).

  14Financial Services Authority (2013b).

  15Arrow and Debreu (1954); Copeland and Weston (1988); Ross (1976).

  16Financial Services Authority (2009).

  17CME (2006).

  18Mollenkamp et al. (2012).

  19Futures Industry Association (2012).

  20CME (2006).

  21BIS (1986; 1999; 2013a).

  22BIS (2014).

  23Camacho and Nieto (2009).

  24Statistisk Sentralbyrå (2016).

  25Statistisk Sentralbyrå (2014).

  26Hodges (2016).

  27Hodges (2016).

  28ECB (2016).

  29BIS (2010a).

  30Hull (1991).

  31See, for instance, Bank of England (2007), McAndrews et al. (2008) and Soultanaeva and Strömqvist (2009).

  32SNB (2015).

  33Stenfors (2014b).

  34Stenfors (2014a).

  35United States District Court Southern District of New York (2012).

  36Vaughan (2015a).

  5. The value of secrets

  1Simmel (1906).

  2CFTC (2016a).

  3State of New York Office of the Attorney General (2009b); McCool (2009); Kollewe (2009).

  4Board of Governors of the Federal Reserve System (2009).

  5Clark (2009).

  6Story and Dash (2009).

  7State of New York Office of the Attorney General (2009a).

  8Central Bank of Ireland (2009).

  9Strange (1986).

  10Euromoney (2012a; 2012b).

  11Goodhart (1989).

  12Vaughan and Finch (2013).

  13Financial Stability Board (2011).

  14BBA (2012b).

  15European Banking Federation (2012a).

  16BBA (2008b).

  17BBA (2008a).

  18ACI (2008a; 2008b).

  19Mollenkamp and Whitehouse (2008).

  20CFTC (2016a).

  21CFTC (2014a).

  22Financial Conduct Authority (2015).

  23BBA (2013); European Banking Federation (2012b); FNO (2011); JBA (2012).

  24Lukes (1974).

  6. Conventions and conspiracies

  1CFTC (2014b).

  2BBC News (2014).

  3Chon et al. (2015).

  4BIS (2016).

  5Euromoney (2012b).

  6BIS (2010b).

  7Barber and Odean (2001).

  8Financial Conduct Authority (2014b).

  9New York State Department of Financial Services (2015).

  10Financial Conduct Authority (2014b).

  11Financial Conduct Authority (2014b).

  12Business Wire (2015).

  13BIS (2016).

  14Aitken et al. (1996); Mitchell (2001); Goodhart and Curcio (1991); Grossman et al. (1997).

  15Yule (1927); Tversky and Kahneman (1974).

  16Ball et al. (1985).

  17New York State Department of Financial Services (2015).

  18Christie and Schultz (1994a; 1994b).

  19SEC (1996a).

  20SEC (1996b).

  21SEC (1996b).

  22European Commission (2014).

  23FEMR (2015).

  24United States District Court Southern District of New York (2015).

  25Stiglitz and Greenwald (2003), p. 26.

  26ACI (2015), pp. 103–4.

  27Cheung and Chinn (2001); Cheung and Wong (2000).

  28Harley (2006), p. 781.

  29McAdams (1997).

  30See, for instance, Carvalho (1983–84) and Lawson (1985).

  31Smith (1991 [1776]).

  7. Rotten apples

  1Enrich (2016).

  2Kahneman (2011).

  3Thaler (1985).

  4See, in particular, Lyng (1990).

  5See http:
//graphics.wsj.com/libor-unraveling-tom-hayes/1.

  8. The perfect storm

  1FEMR (2015).

  2European Council (2015), p. 79.

  3ICE (2016).

  4IBA (2014).

  5HM Treasury (2012).

  6IBA (2014).

  7Financial Conduct Authority (2013).

  8Hickey and Grierson (2015).

  9Verlaine and Finch (2014).

  10Finch et al. (2016).

  Glossary

  1http://lexicon.ft.com/Term?term=Collateralised-debt-obligation-CDO.

  2https://www.handbook.fca.org.uk/handbook/MAR/1/6.html?date=2016-06-30.

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