Market disruption clause

Author: | Published: 1 Dec 2008

Banks are increasingly frustrated by the publicly quoted Libor being lower than the actual rates they pay for Eurodollar deposits. The market disruption clause is the main reason why.

The most often cited reason is that banks on the British Bankers Association's (BBA's) panel do not want to report their true, higher costs of funds because it may be seen as reflecting a desperate need for cash. Another possible explanation derives from the fact that the market today is relatively thin, particularly for deposits with longer tenors, leading some to believe that rates quoted by the panel banks for longer-term deposits do not appropriately reflect such market conditions and may not be completely reliable.

Explanation The possibility that publicly quoted Libor does not reflect a bank's cost of funds is contemplated by most credit documentation in a provision often referred to as the market disruption clause. This protects lenders against both:...