Libor scandal lessons unleash volatility in #UAE’s bank rate

Libor scandal lessons unleash volatility in UAE’s bank rate:

The UAE wanted to inoculate its banking benchmark against manipulation after Europe’s rate-rigging scandal.

The result: a lending reference rate so volatile it’s a challenge to derivatives traders. Under the new method implemented last year, the Gulf state’s central bank gives priority to data from actual executed transactions between lenders and large companies. Previously it relied largely on estimates to determine the rates they would charge each other for short-term loans.

The Emirates Interbank Offered Rate underpins many dirham-denominated loans and is also a benchmark for derivative products such as swaps, used to hedge against floating interest rates. After the changes, the Opec’s third-biggest producer ended up with an official reference rate whose spread over Libor has swung in the past month from eight basis points to minus 22, according to data compiled by Bloomberg.