The LIBOR Question

Just before eleven o’clock every morning, sixteen individuals each sitting at their respective desks at one of the sixteen most prestigious banks in London – nursing their second, perhaps third, cups of coffee – ask themselves the question: at this time, at what interest rate could my bank borrow funds, at a reasonable market size, from other banks?

Of the sixteen rates submitted in answer to that question, the highest and lowest four are immediately struck out, and an average is taken of the remaining middle eight. The figure reached is the London Inter-Bank Offered Rate (LIBOR), and the question as framed above follows the British Bankers’ Association’s (BBA’s) definition of it. Before it started to be phased out in 2021, LIBOR underpinned trillions of dollars’ worth of financial products. At the time of writing, thirty-one LIBOR settings have ceased; the remaining four will be phased out by the end of next year.

Last month, Tom Hayes – a former derivatives trader at UBS and Citigroup, and the first British banker to be convicted of a criminal offence following the Financial Crisis – filed an appeal against his August 2015 conviction for conspiring to make false LIBOR submissions. The case against him, brought by the Serious Fraud Office, was that he sought to influence the LIBOR submissions made by UBS and Citigroup in order to improve his trading position. The Court of Appeal will be familiar with his case, having heard an interlocutory application in January 2015 and an appeal against conviction and sentence in December 2015. He has already served his eleven-year sentence.

Earlier this year, the Criminal Cases Review Commission referred his conviction for a third visit to the Court of Appeal. This followed the decision of the 2^nd Circuit Court of Appeals in Manhattan in January 2022 to overturn the convictions of two Deutsche Bank derivatives traders who faced similar allegations, Matthew Connolly and Gavin Black, in a judgment reached, in no small part, on the court’s interpretation of the BBA’s definition of LIBOR. With that decision, every US conviction for LIBOR manipulation has now been reversed.

Mr Hayes’s case is likely to turn on whether or not it was unlawful for a LIBOR submission to take into account the submitting bank’s commercial interests. His defence throughout his trial, and on appeal, proceeded on the basis that, fundamentally, it was a misnomer to imagine there was ‘one true LIBOR’ on any given day: in reality, there existed a range of rates at which a bank could borrow (depending on a number of market factors, not least the broker they approached) and that it was not only lawful – but normal commercial practice – for a submitter to take into account the positions of a trader (whose derivate positions were underpinned by LIBOR) when selecting a rate – from the range of permissible, accurate rates – to submit.

This argument was rejected by Mr Justice Cooke at trial and has been rejected by the Court of Appeal twice – on the last occasion, by the then Lord Chief Justice, Lord Thomas, the then President of the Queen’s Bench Division, Leveson LJ, and Gloster LJ. The position of the UK courts in his case has consistently been that a LIBOR submission would be tainted by any consideration of commercial interest – even if the submission fell within a permissible range of rates – such that it could no longer represent the genuine opinion of the person submitting the figure.

This approach is in stark contradiction to the position the US courts have reached. In the Connolly and Black case, the court held that the LIBOR submissions made by Deutsche Bank were not rendered false because they took into account the commercial impetus of the two derivatives traders; indeed, the court found that nothing prevented a LIBOR submitter from receiving input from a derivatives trader. As long as it was possible for the bank to borrow at the submitted rate, then the submission was not false – irrespective of its motivation.

It is entirely conceivable that irreconcilable positions might exist in different legal jurisdictions. But when the BBA’s definition of LIBOR is the same on both sides of the Atlantic, and both courts have declared that its language supports their distinct conclusions, things become complicated. With that in mind, is it possible that, just after eleven o’clock in the evening, judges sitting in the most prestigious courthouses in New York and London – their fourth, perhaps fifth, cups of coffee cooling beside their keyboards – could answer the same question in a different way?

Max Mills