Global regulators called for nations to overhaul rules for interbank lending rates and other so-called market benchmarks as a matter of urgency as authorities seek to repair the damage wrought to market confidence by rate-fixing scandals.
The Financial Stability Board said it would report in July on progress made in identifying alternatives to tarnished benchmarks, and on steps to improve oversight of rate setting.
“The current willingness of banks to participate in rate-setting panels cannot be taken for granted, in view of the perceived increase in regulatory, litigation and reputational risks arising from recent cases,” FSB Chairman Mark Carney said in a letter to finance ministers from the Group of 20 counties dated April 15 and published yesterday. “Uncertainty over the continued viability of a number of widely used reference rates represents a potentially serious systemic vulnerability.”
The setting of benchmark rates has faced a wave of criticism after U.S. and U.K. regulators uncovered widespread attempts by banks to manipulate the London interbank offered rate, or Libor. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined about $2.5 billion and at least a dozen firms remain under investigation.
Other interbank lending rates, as well as benchmarks used in the $379 trillion swaps market, have also come in for scrutiny. The U.S. Commodity Futures Trading Commission is probing suspected rigging of the ISDAFix rate used as reference for derivatives trades.
There is an “urgent need to identify and validate suitable alternatives to existing financial benchmarks, anchored in observable market transactions,” Carney, the incoming Bank of England Governor, said in the letter. The board is discussing possible alternatives with the financial industry, he said.
The FSB brings together finance ministry officials, central bankers, and regulators from the G-20.
The call for benchmarks to be based on real data echoes proposals this week from a panel of global supervisors led by CFTC Chairman Gary Gensler and U.K. Financial Conduct Authority Chief Executive Officer Martin Wheatley. It warned in a report on April 16 that benchmark setting is a process with “opportunities for abusive conduct,” through submission of “false and misleading data.”
The task force, set up under the auspices of the International Organization of Securities Commissions, is examining a far broader range of benchmarks than interbank lending rates, including rates underpinning derivatives and commodities markets. Iosco is a member of the FSB.
The probes into interbank lending lending rates have sparked an exodus of banks including Citigroup Inc. and HSBC Holdings Plc from some the panels that set the benchmarks.
Michel Barnier, the European Union’s financial services chief, has said that he will propose legislation this year that would toughen regulatory oversight of benchmarks, and force banks to participate in rate-setting panels.
Carney also said that the FSB would press ahead with drawing up rules for repurchase agreements and other types of so-called shadow banking activities.
The group is seeking to set minimum standards for how investors should calculate possible losses on such so-called repo trades, he said.
Carney said that banks are ahead of schedule in meeting tougher international capital rules, known as Basel III, that are scheduled to take full effect in 2019.
The remaining gaps in banks reserves “can easily be closed through retained earnings during the transition period that runs to 2019,” Carney said.
Banks in the EU “have more to do than those elsewhere to close the gap,” Carney said in the FSB letter. “This is one reason for the relative tightness of credit conditions in the single market.”