Hi,When we are building a LIBOR curve (say 3M LIBOR curve), why is it a practice to select deposits in the short end (Until 3 months maturity) instead of Rate indexes? Since it's LIBOR curve, wouldn't it make more sense to select LIBOR rate indexes so that the "Internal Arbitrage" that might exist with the Deposits will not exist with the Rate Indexes?PS: I have searched the forum and couldn't find an answer

I don't see how using rate indices can actually work here ? A rate index tells you the growth of an investment in a deposit or bond or some such thing.

We use the LIBOR quote.

I don't think LIBOR quotes < 3M or rate indices (not sure what the heck they are) are right to use. Apart from the basis issues, I would prefer something live. In the past, I've used the live shorter term OIS plus a static basis implied by yesterday's fixing.

I think he means rate indices = last available fixing.From what I saw:- in general, it gives better forward curves if you just just include the cash tenor consistent with what tenor the curve should project (e.g. start only with the 3m cash in a 3m Libor curve at the short end, the 1m-4m FRA etc. or alike), and drop the shorter tenors (like ON, TN, SN, 1w ...). Otherwise you get bumps into the curve, which do not look very natural... this is no big surprise i guessConcerning the quote to use- for EUR, cash quotes can be very well used in the sense that they are close to the actual fixing while at the same time being live- for non EUR currencies, this does not hold. For these the OIS + static basis approach seems a good one.The latter two points may of course be due to the specific broker quotes we use.

Yeah, so I have used both in the past in EUR and eventually I ended up dropping the EUR depos. They were just too flaky and unpredictable. Sure, most of the time they'll be OK, but it's such a waste of time when you end up having to investigate what's wrong with the feeds every week or so. To be sure, that was a while back, so maybe things have improved since then.

By Rate Indexes I meant LIBOR quotes.For example, we generally use the following deposits until 3 months followed by futures until 3 years and then followed by Swaps.DEPOSIT/ONDEPOSIT/TNDEPOSIT/SWDEPOSIT/1MDEPOSIT/2MDEPOSIT/3MNow can't we instead use the belowLIBOR/ONLIBOR/TNLIBOR/SWLIBOR/1MLIBOR/2MLIBOR/3M quotes? Also can you please tell me what the Deposit interest rate is linked to in the market? For example What interest does DEPOSIT/ON pay? Does it pay LIBOR/ON? Can I compare DEPOSIT rates and LIBOR rates in anyway? (I mean are they linked anyway)

Yes, just like I thought... LIBOR quotes = rate indices.Like I mentioned previously, the reasons you don't wanna use the LIBOR fixings are a) the inconsistent term basis (this will apply to deposits as well); and b) LIBOR fixings are published once a day and don't update.Deposit rates are rates on unsecured interbank transactions, period. LIBOR is a fixing that is calculated by a poll of a bunch of banks. Ideally, the poll produces a result which is close to the rates where the depo trades are transacted.

Now that leads me to another query.Do you mean to say the LIBOR quotes are updated only once a day after polling. I think we also get LIVE feed for LIBOR quotes from Reuters/BB. Could you tell me how it is arrived at? So when we have the LIVE feed, we can as well use it instead of Deposits.As I understand LIBOR also represents unsecured Inter bank lending/borrowing. So how then Deposits are different from these LIBORs?Since LIBOR is only an offer rate and (no actual lending/borrowing might happen), do Deposits represent the actual lending/borrowing rates? I think we have LIBID for it.I am not a core finance guy but help Trading desks with the trading applications. So excuse if they are very fundamental. Thanks in advance.

Kiran (sorry if I got your name wrong), it might be a good idea for you to go to the BBA website (BBA LIBOR) and educate yourself about what LIBOR is and what it isn't.It is NOT possible for you to have a LIVE feed for LIBOR quotes. There's no such thing as a "live LIBOR quote", so whatever you're getting from Reuters, it ain't LIBOR. As to what LIBOR represents and how the depos are different, pls see my previous post and the link above.

Hi,That clarifies a lot of things. The live feed we were getting was for LIBOR based Swaps.The bbalibor website mentions two things as 'Fixing Day' and 'Value Day'. For example, the difference between Fixing day and Value day for USD is 2 business days. Does it mean that the USD/LIBOR fixed today(Wednesday) would be used two business days after (say Friday) by financial institutions? Does it mean Reuters takes two days to clean/trim LIBOR data to publish?I guess Deposits are much like LIBOR (unsecured loan rates) but the only difference is LIBOR is cleaned EOD data whereas Deposit rates are live dataThanks,Kiran

Well, no, "value date" refers to the settlement/effective date lag for the transaction. Simplistically, it's the time between the moment the trade is agreed and when the actual cash/asset gets delivered. These lags are common across a variety of asset classes/transactions. In the case of USD LIBOR, the fixing from time T applies to a notional transaction whose effective date is T+2 (e.g. a USD depo trade done today where the money will actually arrive in 2 days).Yes, sorta, pls note what I said in my earlier posts. The only thing is that LIBOR is not EOD (more like "middle of day") and I don't think "cleaned data" is the right term to use.