The recent ICAP fine for Libor-rigging has again pushed the interbank rate into the spotlight, but according to Rate Validation Services CEO Kevin Milne benchmark reform efforts are progressing well.
ICAP was slapped with a £55 million fine by US and British regulators for attempting to manipulate the London inter-bank lending rate, which is key to setting the price on a wide range of financial products, from mortgages and car loans to US$350 trillion worth of derivatives contracts. Three major banks – Barclays, RBS and UBS – have already paid more than £1 billion in penalties.
The scandal has led to a rethink of the benchmark model, or in the case of Commodity Futures Trading Commission (CFTC) chairman Gary Gensler, talks of scrapping Libor and European counterpart Euribor. Gensler has since changed his position.
Earlier this month, he said Libor reforms were needed at a global level and welcomed the Financial Stability Board’s (FSB) replacement of the British Bankers Association with NYSE Euronext as an independent Libor administrator.
NYSE Euronext will assume its new role in early 2014. Regulators are currently discussing how the Libor rate will change.
Milne said regulators worldwide were trying to avoid regulatory fragmentation around Libor.
“Historically, regulators and authorities would make principal statements and then it was down to each individual country to interpret whatever they saw fit. So each national regulator could implement something dramatically different,” he said. “But today everybody wants consistency, clarity and everything to be the same as much as possible.”
In Asia, for example, authorities are waiting to see what comes out of the European Commission, CFTC, and the International Organization of Securities Commissions (IOSCO) to then create a clear path towards a global standard, Milne said.
Regulatory action
IOSCO earlier this year published benchmark principles, intended to promote the reliability of benchmarks. The principles touch on governance, quality of methodology and accountability.
“The data used to construct a benchmark should be based on prices, rates, indices or values that have been formed by the competitive forces of supply and demand, and be anchored by observable transactions,” the report said. Though IOSCO then concluded that not all benchmarks should be determined solely on transaction data.
Milne said IOSCO’s principles were encouraging and were almost replicated in its entirety by the European Commission, which published a draft law to regulate benchmarks at European level last week.
The Commission proposes most benchmarks to be brought under the oversight of national supervisors, while more critical benchmarks would fall under the scope of the European Securities Markets Authority, which would lead a team of national supervisors.
“I’ve worked in financial markets for 30 years and this is the most globally coordinated reform I’ve seen,” Milne said.
“There is a clear established framework that people will start working towards. There is very active debate on how to make sure the reference rate is more accurate, and to have the governance in place to make sure it’s not manipulated.”
Milne said although it was easy to say Libor should be scrapped, the rate is too entrenched in consumer life.
“You look at the amount of derivatives, student loans, mortgages that are tied up to Libor, going around and re-writing hundreds of thousands of mortgage deeds with consumers would prove difficult. In some cases it might be impossible,” he said.