Several MBS sources reported a rumor last week that the British Bankers' Association (BBA), the organization that sets rate fixings which determine the final settlement price for Eurodollar and LIBOR futures contracts, was considering changing its published Libor fixings to LIMEAN (London Interbank Mean) fixings, from now on.
Sources said that if this is true, it could have important ramifications for swap-contract pricing.
Abbreviated as LIMEAN, this alternative pricing benchmark is the average of the London Interbank Offered Rate (Libor) and the London Interbank Bid Rate (Libid). Graphically, LIMEAN is the midpoint of the Libor-Libid spread, and has been used as a reference for floating-rate payments.
Swaps contracts (as well as Eurodollar contracts) are traded off the Chicago Mercantile Exchange. While officials at the Exchange said that they are not familiar with this rumor, they added that if such a change was to be discussed, there would first be a dialogue between the BBA and other financial organizations.
"This could most definitely skew the Libor index, if it is true," said one MBS investor who had heard the rumor. "Just as there has been rumors that the one-year Treasury bill is going away, it will be interesting to see if this will eventually cause some sort of changing of Libor."
A new settlement procedure which based the settlement price for Libor and Eurodollar futures contracts on the BBA's rate fixing began in Jan. 1997. The change to Eurodollar and Libor futures final settlement procedure was made in order to facilitate convergence of Chicago Mercantile Exchange interest-rate contracts with over-the-counter interest-rate markets, which typically fix to BBA rates.
Market-determined interest rates are important indicators for monetary policy, since they can give a measure of market expectations of future policy.
