Brussels-based lobby group Finance Watch has responded to the European Commission’s consultation on the use benchmarks for financial contracts, insisting self-regulation “is not an option”.
Finance Watch, formed in April 2011 in a bid to better represent the public in financial policy matters, favoured increased regulation for the oversight and management of financial benchmarks.
The European Commission’s consultation was held in light of the LIBOR scandal, where a number of investment banks were accused of rigging the widely-used benchmark between 2005 and 2007 to benefit their own derivatives positions and misrepresent the health of the interbank lending market. Barclays was fined over US$450 million in June by US and UK regulators for the manipulation, with punitive action for some of the other LIBOR-setting banks expected in due course.
“We support the Commission’s view that self-regulation in this area is not an option,” said Finance Watch secretary general Thierry Philipponnat.
In its response to the Commission’s consultation, Finance Watch noted there was currently a regulatory gap around benchmarks; while the financial instruments which benchmarks underpin are regulated, the benchmarks themselves are not.
The group favoured giving power to a European securities regulator to oversee rate setting and the calculation of benchmarks. Included in these powers would be the ability to investigate alleged misbehaviour and hold the people responsible to account.
Finance Watch also recommended regulators take a closer look at the basis risk of some benchmarks to ensure they actually met the exposures end-investors were hoping to achieve.
One criticism of LIBOR which has become more pronounced since the investigation is its diminishing suitability for instruments like interest rate swaps, FX options and forward rate agreements, given the growing sophistication of the market.
Finance Watch said mandatory transaction reporting and the development of a consolidated tape to centralise information on executed trades, as well as obligations on index providers and their contributors that include legal responsibilities, should also be considered.
“Financial benchmarks – including commodity price indices – are in most cases de facto public goods. Their social benefits should be maximised and the possibility for their misuse tightly scrutinised,” commented Benoît Lallemand, senior research analyst at Finance Watch and co-author of the group's consultation response. “We would like to see a regulatory regime for the way benchmarks are produced and used to promote the core economic purpose of benchmarks and to safeguard their integrity.”
Although many market participants agree there is a need to reform LIBOR and other financial benchmarks, the long-dated nature of the exposure they support mean any shift is likely to occur gradually. US derivatives market NYSE Liffe has recently pushed the use of its DTCC GCF repo index, which lists the daily interest rates for the general collateral finance repurchase agreements market, as an alternative to LIBOR.