Gensler-Wheatley Panel Aims to End Conflicts in Benchmark Rates

Regulators will seek to eliminate conflicts that have led to manipulation of benchmark lending rates while investigations into Libor continue around the world.

A panel led by U.S. Commodity Futures Trading Commission Chairman Gary Gensler and U.K. Financial Conduct Authority Chief Executive Officer Martin Wheatley will issue a report as soon as today with draft recommendations on how rates should be set and what oversight regulators should have.

The panel is looking at how benchmarks can be strengthened after an investigation by U.S. and U.K. regulators uncovered widespread attempts by banks to manipulate the London interbank offered rate. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined around $2.5 billion and at least a dozen firms remain under investigation.

“There are hundreds of benchmarks with different features, but a common issue with some of the indices not based on actual transactions is the potential conflict of interest by the administrator who represents the market players and submitters themselves,” said Rosa Abrantes-Metz, an economist with New York-based consulting firm Global Economics Group Inc. and a professor at New York University’s Stern School of Business. “Part of what the CFTC” and the FCA “are undertaking is to try and make sure these conflicts are minimized.”

Overarching Principles

The International Organization of Securities Commissions, which is issuing the report, will focus on overarching principles rather than specific rules in the draft proposals, according to two people familiar with the process who declined to be named because the report hasn’t been published. After the report is released, IOSCO will seek industry views on the plans before issuing final standards this year.

Madrid-based IOSCO, which represents regulators in more than 100 countries, responded to the interbank-rate scandal last year by announcing the task force, which is reviewing benchmarks across different financial sectors.

Gensler has said that the challenge for regulators is how to improve rates that rely on input from panel members and where there isn’t an underlying market on which to base it.

Organizations in charge of setting benchmark rates should seek to “verify the accuracy and plausibility” of the data they receive from banks and other market participants, IOSCO said in a paper in January. Current processes raise concerns over “potential inaccuracy or manipulation.”

The recommendations will focus on the governance of data submitters. IOSCO has previously said that allowing rate-setting panels to select their own members may “give rise to conflicts of interest.”

FSB Enforcement

Enforcement of the new rules may fall to another group of global regulators at the Financial Stability Board, which was created by the Group of 20 nations at the height of the financial crisis in 2009. The FSB may conduct so-called peer reviews to ensure nations have adequately adopted the IOSCO principles.

“It will start to be a benchmark in its own right,” said Simon Morris, a regulatory lawyer at CMS Cameron McKenna in London. “Any laggard jurisdiction may find itself getting a poke in the ribs.”

Regulatory oversight of Libor was handed to Wheatley’s FCA about six months after he proposed wide-ranging changes to the benchmark interest rate in September. The so-called Wheatley Review recommended scrapping more than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly and creating a code of conduct for lenders contributing to the rate.

More Rates

The IOSCO proposals will extend to dozens more rates than the Libor-style interest benchmarks that the Wheatley report was limited to. Rates used as a reference for commodity spot and futures prices as well as those underpinning the pricing of repurchase agreements will fall under the latest report.

IOSCO in October asked companies involved in setting price levels used in the oil market to adopt robust controls and to protect the reliability of the benchmarks by introducing conflict-of-interest policies, providing audit trails to regulators and establishing a formal complaints process.

“IOSCO will be looking much more at criteria for setting standards for setting benchmark regulation,” Morris said. “It’ll be them saying, we think that when you set about regulating benchmarks or benchmark providers, these are the kinds of principles you should bear in mind.”

Examples of specific benchmarks other than interbank lending rates include the Overnight Index Swap and ISDAfix rates used in derivatives markets.

ISDAfix Probe

The CFTC has started a probe of possible ISDAfix manipulation, sending subpoenas to current and former brokers at ICAP Plc’s rates-swap desk in Jersey City, New Jersey, as well as to the International Swaps & Derivatives Association and as many as 15 Wall Street dealers, Bloomberg News reported April 8.

The ISDAfix probe is only the latest of dozens of investigations into benchmark rates such as Libor and Euribor around the world.

Authorities in Japan, Switzerland, Canada, Hong Kong, Singapore, and the European Union are also investigating how derivatives traders worked together to rig rates in order to benefit their own trades, in some instances paying bribes to brokers for their help influencing rate submissions from other banks.

The U.S. Department of Justice and the U.K. Serious Fraud Office are conducting criminal investigations that have resulted in three arrests and charges against two former UBS bankers in America.

While fines have been levied against UBS, RBS and Barclays, politicians are still saying tougher punishments should be meted out.

“I would be most surprised if we don’t see charges brought and if at some point see someone serve a custodial sentence,” Chuka Umunna, a Labour opposition member of the U.K. Parliament, said in a speech in London yesterday. “We need to see strong action.”

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