In a New York Times editorial Monday, CFTC Chairman Gary Gensler alluded to the recent LIBOR benchmark rate-fixing scandal in calling for a new benchmark rate whose structure would lend itself to objective verification more than the current system.
Instead of blaming individual employees, as the banks implicated have done, Gensler traced LIBOR’s flaws to the fact that the interbank lending on which the rate is putatively based has effectively dried up, severing much of the rate’s connection to reality. Gensler points to discrepancies between LIBOR and other benchmarks rates such as EURIBOR, which is based on the rate at which a bank thinks other banks are able to borrow rather than on the rate at which it thinks it is able to borrow.
Gensler concludes that any benchmark rate widely used to set the terms of transactions such as swaps must be “based on observable transactions.” As long as a rate is based on bankers’ guesses, even if these are made in good faith, it cannot have enough integrity to support the confidence of consumers who use products based on it.
