Gary Gensler, the U.S. Commodity Futures Trading Commission (CFTC) head addressed a roundtable yesterday as part of the International Organization of Securities Commissions (IOSCO Task Force. In his opening remarks to the roundtable, Gensler spoke to many issues on the minds of regulators, including the IOSCO consultation, Libor, and the overarching scope of indices, transitions, and benchmarks.
Rate Manipulation & Viability
Gensler, who leads the agency that initiated the investigation of rate manipulation, has frequently questioned the long-term viability of Libor and other benchmark rates, stating how underlying markets must be based on transactions – not estimates – from banks.
From Gensler’s address:
[A] benchmark should as a matter of priority be anchored by observable transactions entered into at arm’s length between buyers and sellers in order for it to function as a credible indicator of prices, rates or index values.
I agree with the consultation report’s statement that for any benchmark to be reliable and have integrity, it’s best to be anchored in real, observable transactions. It’s only through real transactions entered into at arm’s length between buyers and sellers that we can be confident that prices are discovered and set accurately.
When market participants submit for a benchmark rate that lacks observable underlying transactions, even if operating in good faith, they may stray from what real transactions would reflect. When a benchmark is separated from real transactions, it is more vulnerable to misconduct.
At the three banks fined for manipulative conduct by the CFTC, the FSA and the Justice Department, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion.
According to Gensler, Libor and other rates are no longer grounded in real transactions, as unsecured bank-to-bank loans have diminished after the 2008 financial crisis. Gensler argues that a revised benchmark interest rate based on real transactions would add stability and integrity to their markets.
CFTC’s commissioner Bart Chilton echoed Gensler’s remarks on Libor, and addressed the roundtable by stating:
I’ve heard many suggest that lots of banks were submitting false rates, so therefore it was acceptable. That is, in no way, cool or copacetic. It violates the law and can hurt consumers and customers around the globe. Rather, the idea that pervasive manipulation, or attempted manipulation, is so widespread should make us all query the veracity of the other key marks. What about energy, swaps, the gold and silver fixes in London and the whole litany of “bors?” Why would they be any different in the minds of those that may have sought to push or pull rates? For me, this means every single mark needs to be reviewed, and potentially investigated.
Finally, these benchmarks need to be based upon real, transparent trades, and not in the control of any individual or entity which may have a profit motive. That means government; quasi-government or an appropriate not-for-profit entity should oversee the circumstances surrounding how marks are established.
The roundtable was held as part of a task force run by the CFTC and U.K. Financial Services Authority that published an initial consultative paper on benchmark rates. The group’s efforts began after Barclays Plc became the first of three banks to pay billions in fines for rigging Libor and other global interest rates. The IOSCO task force will seek additional public comments before the final document is published.