Safekeeping DIBOR: lessons from the LIBOR scandal

Dhaka Interbank Offered Rate (DIBOR) saw its inauguration in January of 2010 by Atiur Rahman, then governor of the Bangladesh Bank. At present, the administration of DIBOR is undertaken by the Bangladesh Foreign Exchange Dealers' Association (BAFEDA), and this includes the duty to calculate the weighted average of the rates submitted by member banks.

DIBOR sets the benchmark interest rate at which banks borrow or lend to each other providing a determinative figure on how much short-term loans and floating rate notes would be valued at a specified maturity date.

A simple example could be construed as this: based on the daily DIBOR rate, Bank X would lend to Bank Y a 30, 60 or 90-day dollar loan.

The unison vision behind all interbank rates is to provide transparency and sustainability concerning the interbank market, and a functional barometer of trust and confidence between the operating banks and the general financial market.

Now, the question that has remained implicit is whether DIBOR rate is vulnerable to manipulation. Indeed, it is. The concern is expressed and further raised from the trial of former UBS trader Tom Alexander William Hayes in the United Kingdom. In August 2015, he was convicted of several counts of conspiracy for defrauding in connection to the manipulation of the Japanese yen LIBOR.

LIBOR (the London Interbank Offered Rate) is well-recognised as the foothold for setting the interbank commercial lending rates internationally on financial instruments such as credit cards, mortgages, and bonds. The rate is known to effect contracts in the estimation of nearly $450 trillion. This astounding valuation stands at approximately a quarter of the global derivatives market.

The summit of the 2007-2008 global financial crisis and the collapse and meltdown of the sub-prime mortgage market saw the incubation of the LIBOR scandal. Member banks and individuals were heavily penalised with fines and barraged with criticisms for conspiring together to artificially strengthen their credibility by submitting false rates to profit from their lending.

Part of the rationale behind the scandal is based on the premise that the various LIBOR rates for different currencies and maturities were not precisely calculated via a quantitative method. Member banks were afforded the leeway to put in some guesswork and/or estimates from their end. However, post-scandal, reforms have been implemented.

At present, the system is based on actual transactions between banks and the Intercontinental Exchange (ICE) acts as a centralised market showing the history of transactions. This achieves the goal of having a transparent market and deters the utility derived from backdoor monopoly.

It is safe to assume that Hayes is just one of the many traders responsible for rigging LIBOR. Nevertheless, he remains the first to be convicted in the UK for this offence and sentenced to a period of 11 years.

Beyond Bangladesh Bank guidelines and BAFEDA 'rules and code of conduct' are modest reminders -- that of Hayes (former UBS trader) and other LIBOR riggers, Jay Merchant and Peter Johnson (former Barclays' bankers) who are serving jail time, fined in six figures or had their assets confiscated.

Not to diminish the standing of the BAFEDA in any respect, it is worth noting that in this turbulent period the supervision and surveillance of LIBOR was superseded by the ICE from the British Banker's Association. This paved the way for a more transparent system.

The expectations from member banks connected to DIBOR are relatively straightforward and they are under an obligation to provide submissions that is and was a genuine and honest representation of their assessment and with the genuine view that the rate submitted is one which would not advantage the submitter unfairly. We should tread carefully so as not to fall within the same trap that led to the LIBOR scandal.

DIBOR is still in its infancy and requires proper nurturing and oversight to ensure it obtains the standing of a benchmark rate that is both trustworthy and reliable. The onus falls on all those concerned to guarantee that it is the case.

The writer is a financial crime consultant at WCC22, an international firm specialising in white collar crime law.