Opening up benchmarks

While criminal proceedings against those who sought to manipulate key financial benchmarks for their own gain rumble on, and new cases come to light on an almost weekly basis, reforming the way benchmarks are governed and calculated has moved more rapidly.

The most recent contribution to provide more robust benchmarks that investors can rely on comes from the EDGEC-Risk institute, which has published a survey of 109 European institutional investors to get their views on the transparency of financial benchmarks.

A vast majority of more than 85% said fully transparent benchmarking processes would be the best way to avoid potential conflicts of interest, a key cause of the Libor scandal, and just 12% thought governance alone was sufficient to tackle the problem.

However, right now institutional investors just don’t think benchmarkers are transparent enough, with just over a third stating they were somewhat satisfied with currently levels of transparency of indices. The biggest problem is most index providers do not give access to historical constituents, something investors think is vital to being able to trust the benchmarks they use.

Improving governance has been a key theme for benchmark providers since the Libor scandal erupted. When IntercontinentalExchange took over the running of Libor from the British Bankers Association at the beginning of this year, it emphasised the robust governance it has in place, intended to prevent any individual or institution from ever tampering with published Libor rates again.

While many others are following suit and strengthening the governance of the benchmarks, most see revealing full details of historic constituents or enabling live replication as a step too far that impinges on their intellectual property.

It’s a fair point, considerable work has gone into devising these benchmarks and opening them up to the world could threaten their business models. However, with trust in benchmarks so low in the wake of the Libor scandal, there is a risk investors will shy away from using benchmarks that don’t live up to a high standard of transparency.

Ultimately, the market cannot be expected to trust benchmarks if they cannot independently verify their accuracy. In the long-run, the benchmark providers will need to open up or they may find investors lose interest.