The effects of LIBOR’s manipulation and discontinuation on volatility and liquidity in LIBOR futures markets

In 2008, suspicions emerged that the London Interbank Offered Rate (LIBOR) had been manipulated; by June 2012, several major global banks had formally admitted this. In response, regulators not only reformed LIBOR but ultimately decided to discontinue it altogether. This paper studies how four key events – two linked to the manipulation scandal and two to the discontinuation – affected liquidity and volatility in 3-month LIBOR futures. Only the final discontinuation in late 2021 triggered a deterioration in market functioning; earlier events, including Barclays’ 2012 admission and the 2017 public announcement of LIBOR's end, had no discernible effects. Disruptions were more pronounced and occurred earlier in the GBP market than in USD, likely reflecting differences in deadline rigidity. Volatility and illiquidity around the discontinuation were smaller than during the global financial crisis or the COVID-19 shock. These results suggest that contrary to widespread concerns among practitioners and regulators, even the phaseout of a systemically important benchmark can be managed without causing prolonged or severe disruption. The paper offers broader insights for policymakers weighing the risks of reforming versus retiring flawed market benchmarks.