How to Reform LIBOR: The Debate Continues
Since the publication of the U.K.’s Wheatley Review in late September, which heralded the beginning of the reform process to fix the scandal-plagued London Interbank Offered Rate (LIBOR) benchmark, a swath of regulatory initiatives has been launched. Yet progress between global regulators and other banks over potential fines for alleged LIBOR manipulation has been cumbersome. To date, only three banks (Barclays, UBS, and Royal Bank of Scotland) have settled with global regulators, despite the dozen or more banks to be implicated. That slow pace of resolution emphasizes the deficit of enforcement powers held by authorities and the need for swift action to bolster the regulatory and legislative framework.
CFA Institute issued a comment letter in response to the European Commission’s consultation, calling for greater transparency over the calculation and production of benchmarks and indices in general, particularly where indices are based on subjective or judgmental inputs. Other important measures we advocated for include robust internal controls, policies, and procedures surrounding the assimilation and contribution of data for the calculation of benchmarks; adequate management reporting and supervision over the provision of inputs; conflicts management policies; and appropriate regulatory oversight. Together, these measures should help underpin the integrity of benchmark indices.
Another international initiative to impact the legislative and regulatory framework is the International Organization of Securities Commissions (IOSCO) task force on financial market benchmarks. That task force, co-chaired by Martin Wheatley of the U.K. Financial Services Authority and Gary Gensler of the U.S. Commodity Futures Trading Commission (CFTC), is developing global policy guidance and principles for benchmark-related activities. Recently, Gensler raised concerns about the long-term sustainability of LIBOR. “While ongoing international efforts targeting benchmarks have focused on governance principles, these efforts cannot address the central vulnerability of LIBOR, Euribor, and similar interest rate benchmarks: the lack of transactions in the underlying market,” Gensler said during a recent speech in London.
Indeed, it is this lack of objective, market-driven data that has prompted another CFTC-led investigation, this time into ISDAfix, an interest rate benchmark used to price swap contracts in tenors of between one year and 30 years. Similar to LIBOR, ISDAfix is an average rate derived from polling brokers, rather than calculated from actual transactions.
Given the multi-jurisdictional nature of these interest rate benchmarks, a global framework of key principles or best practices should at least help engender better governance and more consistent standards across countries. Eighty-nine percent of CFA Institute members responding to our survey on LIBOR agreed that a global framework of key principles or best practices should be developed for internationally used benchmarks.
On top of the IOSCO initiative, the Bank for International Settlements, under the coordination of the Financial Stability Board, has set up a group of senior officials to examine reference rates used in financial markets.
This frenzy of regulatory initiatives at the European and global levels highlights both the zeal for reform and the desirability of achieving some level of international coordination. These are important steps to ensure that similar benchmarks carry similar standards of governance, transparency, and oversight wherever they are used.
Moreover, it is hoped that these measures can help begin the long process of rebuilding confidence and integrity in our capital markets. Public trust depends on their success.
Read more about CFA Institute policy recommendations in our recently published issue brief.