Bloomberg News

Benchmark Rates Should Be Anchored in Real Data, Iosco Says

April 16, 2013

Global regulators said interbank lending rates and other so-called market benchmarks should be based on data from actual trades in a bid to restore credibility of indexes tarnished by price-fixing scandals.

A panel led by U.S. Commodity Futures Trading Commission Chairman Gary Gensler and U.K. Financial Conduct Authority Chief Executive Officer Martin Wheatley is also pushing for banks involved in benchmark setting to sign up to a code of conduct as part of a drive to make the process more robust.

“To promote market integrity, it is critical that benchmark interest rates be anchored in observable transactions and supported by appropriate governance structures,” Gensler said in a statement on the International Organization of Securities Commissions’ website. Iosco will seek views on the proposals before publishing final standards later this year.

The panel is looking at how benchmarks can be strengthened after an investigation by U.S. and U.K. regulators uncovered widespread attempts by banks to manipulate the London interbank offered rate, or Libor. Royal Bank of Scotland Group Plc, UBS AG (UBSN), and Barclays Plc (BARC) have been fined around $2.5 billion and at least a dozen firms remain under investigation.

Other interbank lending rates, as well as benchmarks used in the $379 trillion swaps market, have also come in for scrutiny. The U.S. Commodity Futures Trading Commission is probing suspected rigging of the ISDAFix rate used as reference for derivatives trades.

Derivatives Traders

Authorities in Japan, Switzerland, Canada, Hong Kong, Singapore, and the European Union are also investigating how derivatives traders worked together to rig rates in order to benefit their own trades.

Iosco, which brings together markets regulators for more than 100 nations to coordinate their rule-making, will seek industry feedback on the proposals through May 16, 2013.

Benchmark setting is a process with “opportunities for abusive conduct,” through submission of “false and misleading data” or attempts to influence personnel charged with compiling data and publishing the rate, according to the Iosco report.

The data used for rate-setting should be based on “observable transactions entered into at arm’s length between buyers and sellers,” according to the report, as the use of such “bona fide observable transactions” builds confidence, it said.

Libor Undermined

The move follows concerns expressed by regulators that Libor was undermined in part because banks submit estimates for how much it would cost to borrow from each other, rather than real transaction data.

Regulatory oversight of Libor was handed to Wheatley’s FCA about six months after he proposed wide-ranging changes to the benchmark interest rate in September. The so-called Wheatley Review recommended scrapping more than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly and creating a code of conduct for lenders contributing to the rate.

“The skepticism that many investors now have as a result of the Libor rate setting process should lead to more transparency in the process,” Syed Kamall, a U.K. Conservative member of the European Parliament, said in an e-mail.

“Regulators need to be able to show a stronger punishment than simply ‘a slapped wrist’ against those who are found to manipulate the rate in future,” said Kamall, who represents London in the assembly.

Wheatley Report

Madrid-based Iosco responded to the interbank-rate scandal last year by announcing the task force, which is reviewing benchmarks across different financial sectors.

The Iosco proposals extend to dozens more rates than the Libor-style interest benchmarks that the Wheatley report was limited to.

Examples of specific benchmarks other than interbank lending rates include ISDAfix, and the the Overnight Index Swap, both used in the derivatives markets.

While fines have been levied against UBS, RBS and Barclays for rigging of market benchmarks, politicians are still saying tougher punishments should be meted out.

“I would be most surprised if we don’t see charges brought and if at some point see someone serve a custodial sentence,” Chuka Umunna, a Labour opposition member of the U.K. Parliament, said in a speech in London yesterday. “We need to see strong action.”

To contact the reporter on this story: Lindsay Fortado in London at lfortado@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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