BRUSSELS — Today Dan Doctoroff, Bloomberg LP CEO and President,
testified before the Committee on Economic and Monetary Affairs
of the European Parliament. The following is a copy of his
testimony.

GOOD AFTERNOON. MY NAME IS DAN DOCTOROFF. I AM THE CEO AND
PRESIDENT OF BLOOMBERG LP, THE MARKET LEADER IN FINANCIAL DATA,
NEWS AND ANALYTICS. I AM HONORED TO HAVE THE OPPORTUNITY TO
PARTICIPATE IN TODAY’S HEARING, SITTING WITH DISTINGUISHED
PANELISTS WHO HAVE DONE SO MUCH TO PROMOTE TRANSPARENCY AND
ACCOUNTABILITY IN THE GLOBAL MARKETS. I AM EXTREMELY
APPRECIATIVE OF THE GOOD WORK OF THIS COMMITTEE, AND OF ARLENE
MCCARTHY WHO NOT ONLY SERVES WITH DISTINCTION AS VICE-CHAIR, BUT
ALSO AS THE RAPPORTEUR FOR THE MARKET ABUSE INITIATIVE.

FOLLOWING THE FINANCIAL COLLAPSE OF 2008, MAJOR INTERNATIONAL
AND REGIONAL INSTITUTIONS, INCLUDING THE E.U., G20, AND IMF,
NOTED THAT A WIDESPREAD LACK OF TRANSPARENCY AND RELIABLE
INFORMATION CONTRIBUTED SUBSTANTIALLY TO THE CRISIS.

AS AN ENTITY THAT HAS BEEN PROMOTING TRANSPARENCY FOR THIRTY
YEARS, BLOOMBERG IS ACUTELY AWARE OF THE VIRTUES OF A
TRANSPARENT REGIME, AND SENSITIVE TO HOW MARKETS AND THE PUBLIC
SUFFER IN THE ABSENCE OF TRANSPARENCY.

THE ABSENCE OF RELIABLE DATA MAKES RISK ASSESSMENT, PRICE
FORMATION AND VALUATION PRACTICES INCREASINGLY DIFFICULT. BY
CONTRAST, A ROBUST TRANSPARENCY REGIME –AND THE MARKET
EFFICIENCIES IT ENCOURAGES–FREES CAPITAL FOR INVESTMENT AND JOB
CREATION, AND SPURS THE DEVELOPMENT OF USEFUL NEW FINANCIAL
PRODUCTS AND INDICES.

TRANSPARENCY FACILITATES EFFECTIVE OVERSIGHT–BOTH GOVERNMENT
OVERSIGHT AND THE OPERATION OF EARLY WARNING SYSTEMS IMPLEMENTED
BY MARKET PARTICIPANTS. MOST IMPORTANT OF ALL, THE AGGREGATE
IMPACT OF TRANSPARENCY IN OUR FINANCIAL MARKETS DRAMATICALLY
ENHANCES INVESTOR CONFIDENCE.

THE FAILURE OF LIBOR, WHICH IS TO SAY THE FAILURE OF THE CURRENT
MECHANISMS DESIGNED TO INFORM MARKETS OF WHAT BANKS CHARGE EACH
OTHER TO BORROW, IS A CLASSIC ILLUSTRATION OF A FAILURE THAT
FLOWS FROM A LACK OF TRANSPARENCY. COMMISSIONER ALMUNIA HAS
CORRECTLY DESCRIBED THIS FAILURE AS “QUITE SHOCKING”. BENCHMARKS
SUCH AS LIBOR THAT RELY ON SUBJECTIVE ASSESSMENTS MADE BY
INTERESTED PARTIES CANNOT CONSISTENTLY REFLECT MARKET REALITIES.
THIS IS SO, EVEN IN THE ABSENCE OF ANY POTENTIAL WRONG-DOING–
AND LIBOR MAY NOT BE ALONE AMONG KEY MARKET INDICATORS IN ITS
NEED FOR TRANSPARENCY-FOCUSED REFORM.

WE KNOW WHAT A BETTER SYSTEM WOULD LOOK LIKE. IT WOULD BE
CHARACTERIZED BY ACCURACY, TRANSPARENCY, IMPARTIALITY, AND DATA-
BASED OBJECTIVITY. THE CHALLENGE, OF COURSE, IS TRANSLATING
THOSE LOFTY GOALS INTO A CONCRETE REALITY.

WHAT WOULD THE INPUTS BE FOR A NEW INDEX? WHICH INSTITUTIONS
WOULD BE SURVEYED AND HOW? ANSWERING THOSE QUESTIONS WILL TAKE
TECHNICAL AND LOGISTICAL EXPERTISE. IT WILL ALSO TAKE A
SIGNIFICANT INVESTMENT. WE BELIEVE THE PRIVATE SECTOR, WORKING
CLOSELY WITH THE GOVERNMENT, CAN DEVISE ANSWERS. INDEED,
BLOOMBERG IS NOW RESEARCHING VARIOUS SOLUTIONS TO MEET THIS
MARKET CHALLENGE.

THIS EFFORT IS IN RESPONSE TO REQUESTS FROM POLICY MAKERS,
INCLUDING THE EUROPEAN COMMISSION AND THE EUROPEAN PARLIAMENT,
FOR A MARKET-LED RESPONSE BASED ON TRANSPARENCY AND REAL-TIME
DATA.

BLOOMBERG’S PRESCRIPTION – LETS CALL IT “B-LIBOR”, THE BLOOMBERG
INTERBANK OFFERED RATE – IS NOT REVOLUTIONARY. IT SIMPLY APPLIES
THE PRINCIPLES OF DATA-BASED ANALYSIS AND TRANSPARENCY.

THE CURRENT LIBOR INDEX IS CALCULATED BY USING BANK ESTIMATES OF
THE RATES AT WHICH BANKS EXPECT TO BE ABLE TO BORROW FROM OTHER
BANKS FOR VARIOUS PERIODS OF TIME. THE ESTIMATES ARE SUPPOSED TO
BE BASED ON ACTUAL LOANS.

ONE KEY PROBLEM WITH THE CURRENT APPROACH IS THE DECLINE IN
ACTUAL INTERBANK SHORT-TERM LENDING AND BORROWING. WITH LIMITED
ACTIVITY, BANKS – ESPECIALLY EUROPEAN INSTITUTIONS – HAVE FEWER
ANECDOTAL TRANSACTIONS UPON WHICH TO BASE THEIR LIBOR
SUBMISSIONS.

EXPANDING THE NUMBER OF CONTRIBUTORS TO LIBOR WOULD PARTIALLY
ADDRESS THIS ISSUE. ALONG WITH LIBOR’S CURRENT GROUP OF TOP-
TIER BANKS REMAINING CONTRIBUTORS, THE INDEX SHOULD BE OPENED TO
ADDITIONAL FINANCIAL FIRMS AND OTHER LARGE COMPANIES WHOSE
TREASURY DEPARTMENTS KNOW THE BORROW/LENDING RATE OF A DOLLAR OR
A EURO. THAT WOULD DIMINISH THE ABILITY OF INDIVIDUAL
INSTITUTIONS TO BIAS LIBOR.

THAT REFORM, BY ITSELF, HOWEVER, DOESN’T MOVE US TO THE DATA
DRIVEN INDEX ENVISIONED WITH B-LIBOR. THE B-LIBOR INDEX WOULD
INCORPORATE CREDIT ELEMENTS CONSISTING OF MARKET-BASED QUOTES
FOR CREDIT DEFAULT SWAP TRANSACTIONS, CORPORATE BONDS,
COMMERICAL PAPER AND OTHER SOURCES OF MARKET OBSERVABLE CREDIT
INFORMATION FOR THE INSTITUTIONS PARTICIPATING IN LIBOR
SUBMITTALS. WE WOULD MONITOR THE VARIOUS QUOTES ON CREDIT
RELATED TRANSACTIONS ON A DAILY BASIS AND SYSTEMATICALLY
QUANTIFY CREDIT PREMIUMS AT VARIOUS SHORT-TERM MATURITY POINTS.
WE WOULD THEN ADD THAT CREDIT PREMIUM TO THE RISK-FREE RATE FOR
EACH APPLICABLE MATURITY IN ORDER TO CALCULATE B-LIBOR ALONG THE
YIELD CURVE.

LET US TAKE ONE VASTLY SIMPLIFIED EXAMPLE. FOCUSING ON EARLY
2009, LETS LOOK AT THE ONE YEAR DOLLAR CREDIT INFORMATION FOR
ALL THE BANKS WHICH CONTRIBUTED TO LIBOR AT THAT TIME. USING
ONLY ONE OF THE SEVERAL TYPES OF MARKET OBSERVABLE DATA –
CREDIT DEFAULT SWAP DATA — WE COMBINE THAT DATA FOR THESE BANKS
VIA A SIMPLE AVERAGING PROCESS. DOING SO, WE ESTIMATE AN
AGGREGATE CREDIT PREMIUM OF ROUGHLY 1.5 PERCENT. THE RISK FREE
RATE AT THAT TIME, IMPLIED BY THE ONE-YEAR OVERNIGHT INDEX SWAP
(OR “OIS”) RATE WAS ROUGHLY FIFTY BASIS POINTS (OR ONE-HALF OF
ONE PERCENT), THUS IMPLYING A (PRO FORMA) B-LIBOR VALUE OF
ROUGHLY 2 PERCENT, THAT IS , 1.5% + 0.5%.

WHILE THIS IS A SIMPLE EXAMPLE, USING ONLY ONE TYPE OF MARKET
OBSERVABLE INPUT, IT ILLUSTRATES HOW THE B-LIBOR INDEX WOULD
THUS BETTER REFLECT PARTICIPATING BANKS’ REAL COST OF CREDIT,
SERVING AS AN EFFECTIVE ALTERNATIVE TO A METRIC THAT IS NOW
BASED ON LIMITED ACTUAL INTERBANK BORROWING AND LENDING. WHEN
LAUNCHED, B-LIBOR WOULD ALSO REFLECT TRANSACTIONS BY
INSTITUTIONS OTHER THAN PARTICIPATING BANKS. ULTIMATELY, WE
WOULD EXPECT TO SEE A VIRTUOUS CIRCLE, IN WHICH THE OBJECTIVE
DATA OF B-LIBOR ACTUALLY IMPROVES THE CALIBER OF INPUTS INTO
LIBOR.

THE MARKET – INCLUDING THE PARTIES TO THE $360 TRILLION IN
MORTGAGE, CREDIT-CARD, DERIVATIVE AND OTHER CONTRACTS THAT RELY
ON LIBOR AS A BENCHMARK – WOULD GAIN CONFIDENCE IN A FIGURE THAT
IS DRIVEN BY THESE MARKET-BASED INPUTS.

THE BEST PROSPECT OF PROVIDING THESE BENEFITS IS THROUGH A
PRIVATE SECTOR INITIATIVE THAT WORKS CLOSELY WITH REGULATORS AND
THE PUBLIC. THAT IS WHY BLOOMBERG IS OFFERING TO CARRY OUT THIS
WORK ON A PRO BONO BASIS. WE ARE WORKING WITH INTERESTED
PARTIES – THE UK TREASURY, FSA, AND OTHERS – TO CRAFT A METHOD
OF DETERMINING INTERBANK LENDING RATES IN WHICH MARKET
PARTICIPANTS CAN HAVE FAITH, AND WHICH IS BASED ON REALTIES MORE
THAN ASSUMPTIONS.

IN CONCLUSION, WHAT WE ARE SUGGESTING ISN’T NEW. INDEED, POLICY
MAKERS HAVE SUGGESTED THIS FOR YEARS. NOR IS WHAT WE ARE
SUGGESTING GOING TO END LIBOR. GIVEN THE WIDESPREAD USE OF LIBOR
AS A REFERENCE THROUGHOUT THE GLOBAL ECONOMY, LIBOR MUST BE
PRESERVED, AT LEAST IN THE SHORT TERM. WHAT WE ARE ADVOCATING
WOULD, HOWEVER, PROVIDE AN INDEX FAR MORE REFLECTIVE OF THE
MARKET’S REALITIES AND FAR MORE INDEPENDENT OF ANY SINGLE
INSTITUTION’S TRANSACTIONS OR SUBJECTIVE ESTIMATES.COMMISSIONER
ALMUNIA HAS DISCUSSED THE NEED TO PUT FINANCE BACK IN THE
SERVICE OF THE REAL ECONOMY. MORE TRANSPARENCY WILL DO PRECISELY
THAT.

I THANK THE COMMITTEE.

Media Contact for Bloomberg:

Catrin Thomas, +44-20-7392-0673, cthomas106@bloomberg.net