The London interbank offered rate is moving across the Atlantic.
Libor, the scandal-tarred benchmark owned by a British banking organization, is being sold to NYSE Euronext, the U.S. company that runs the New York Stock Exchange. The deal is the British government’s latest attempt to salvage Libor’s integrity, after multiple banks acknowledged trying to profit by rigging the rate.
While Libor underpins trillions of dollars in financial contracts and generates about £2 million a year in revenue, a person familiar with the deal said the benchmark rate was sold to NYSE for a token £1—a sign of the heavy toll inflicted by the rate-rigging scandal.
The deal means that the City of London will lose one of the institutions most closely associated with its rise as a global financial hub in recent decades. The new owner will be the institution that is most closely associated with Wall Street.
For NYSE, the deal is part of a recent effort by exchanges to take over benchmarks like Libor in the hopes of converting them into new business opportunities in the derivatives markets. NYSE itself is in the process of being acquired by IntercontinentalExchange Inc., an Atlanta-based company that is one of the world’s largest operators of derivatives exchanges. Libor and similar benchmarks are components of interest-rate derivatives that are heavily traded on exchanges in the U.S. and Europe.
British authorities last year started looking for a new owner for Libor, after concluding that the British Bankers’ Association shouldn’t be responsible for administering a key benchmark. After a competitive bidding process, a government-appointed commission picked NYSE, which will formally take over Libor early in 2014.
Sarah Hogg, who headed the U.K. commission that ran the Libor sale process, said Tuesday that handing the benchmark to NYSE “will play a vital role in restoring the international credibility of Libor.” While Libor’s new parent company will be American, the rate will be administered by a British subsidiary that will be regulated by the U.K.’s Financial Conduct Authority.
The deal immediately encountered criticism. It is “far from ideal,” said Bart Chilton, one of the commissioners who runs U.S. regulator the Commodity Futures Trading Commission. “Whenever there’s a profit motive involved in setting [these benchmarks], I get suspicious.”
Mr. Chilton, who added he would have preferred a “neutral third party” to take over Libor, said it would be misleading to suggest the deal would resolve all the problems that have bedeviled Libor. “I’m not swallowing that.”
Some British officials decried the loss of an important institution to a rival financial center. Following the Libor sale, “the French and the Germans will be rubbing their hands with glee at the prospect of stealing other financial markets from the U.K.,” said John Mann, a Labour Party lawmaker.
The BBA launched Libor in the 1980s as a way for banks to set interest rates on syndicated corporate loans. The rate is based on daily estimates by banks about how much it would cost them to borrow from other banks. Libor eventually morphed into a ubiquitous cog in the financial system, and today serves as the basis for rates on everything from residential mortgages to derivatives.
Doubts about Libor’s reliability surfaced in 2008 after a series of Wall Street Journal articles highlighted apparent problems with the rate. But governments and central banks balked at regulating Libor, and the BBA failed to stop banks from continuing to skew the rate. Only last summer, after Barclays PLC admitted trying to rig Libor, did British authorities launch a process to overhaul the benchmark.
Part of that process involved finding a new home for Libor. In addition, following a U.K. regulatory panel’s recommendation, the BBA earlier this year phased out certain variations of Libor that were especially vulnerable to manipulation. Also, the British government recently made it a crime to rig Libor.
Martin Wheatley, head of the Financial Conduct Authority, said he expects NYSE “to develop further the oversight and governance of Libor.” The chief executive of the NYSE Liffe derivatives exchange, Finbarr Hutcheson, said the company would continue “the process of restoring credibility, trust and integrity in Libor as a key global benchmark.”
At least initially, NYSE is expected to continue the current process for calculating Libor, according to a U.K. Treasury official. That will be supplemented by cross-checking those submissions against market transactions, the official said.
The new owner plans to work with market participants and regulators to “evolve how Libor is calculated” to bring it in line with recommendations last year from another U.K. commission, the official said.
Among other bidders for Libor were Thomson Reuters, which currently compiles Libor every day on the BBA’s behalf, and Markit, a data provider specializing in derivatives, said people briefed on the process.
NYSE plans to continue licensing Libor to other parties for use in financial products, according to a person familiar with the deal. The benchmark is expected to keep its current name.
Analysts said the deal will give NYSE bragging rights as owner of a benchmark that is central to the market for a variety of derivatives. Exchanges in recent years have gravitated toward derivatives trading because the markets bring higher fees than trading in stocks.
But NYSE could face years of regulatory, legal and political scrutiny as it tries to repair Libor’s battered reputation.
“There’s a risk to whoever takes on the management,” said Andrew Wilkinson, chief economic strategist for Miller Tabak Co. “But as long as the whole thing’s done at the end of the day fairly and everyone can agree on what constitutes the appropriate rate, there will be less regulatory scrutiny going forward.”
–Katy Burne
and Jean Eaglesham contributed to this article.
Write to David Enrich at david.enrich@wsj.com, Jacob Bunge at jacob.bunge@dowjones.com and Cassell Bryan-Low at cassell.bryan-low@wsj.com
