Broken Benchmarks

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Imagine a “benchmark” as a notch on a carpenter’s bench used to measure. Simple enough. But what if the carpenter cheated, moving his marks to be able to charge a little more for a piece of lumber? In their role in modern financial markets, benchmark rates help establish costs for mortgages, gasoline and money itself. They’re hard to understand and for years they were easy to manipulate. At the heart of the problem lay an inherent conflict: The figures were determined by the very firms that had the most to gain from where they’re set. Traders fiddled with the rates for the own profit, creating some of the banking industry's biggest scandals. Regulators hope that they've finally got a handle on the problem. 

The Situation

Libor, the global borrowing rate that became a byword for corruption, is headed for the grave. While rules around several other benchmarks have been tightened, regulators will phase out the London interbank offered rate completely by 2021. They say there isn't enough data to produce reliable figures for the rate, which underpins more than $350 trillion of financial products. The tampering first came to light in 2008; by the end of 2016, a dozen banks had paid total penalties approaching $10 billion. Banks are still settling another set of rate-rigging cases relating to manipulation in the $5.3 trillion-a-day currency market. They'd paid $10 billion in fines and a further $2 billion to settle private claims by mid-2017. U.S. regulators are also examining at least 10 banks as part of an investigation into rigging in precious metals such as gold and silver, while benchmarks used in oil and derivatives have also been shown to be vulnerable to abuse. Still, while there have been a handful of high-profile convictions of individual traders, prosecutors have sometimes found it hard to secure guilty verdicts. Several traders have been acquitted at trial — a positive sign for traders from Deutsche Bank AG and Barclays Plc due to stand trial in September 2017 for manipulation of Euribor, a reference rate for loans. 


Source: Bloomberg

The Background

Benchmarks were developed to underpin rates in contracts or to assign standard end-of-day values to particular holdings, and are set by a variety of methods. Libor is based on a daily survey of about a dozen big banks that estimate their short-term borrowing costs. The London gold and silver fixes were set on a private telephone call of a handful of people for decades until the process was overhauled in 2014. WM/Reuters rates, a benchmark for the currency markets, were calculated from the median of trades in a 60-second period until the window was widened to 5 minutes in 2015. The rate-setting mechanisms shared fundamental characteristics that left them prone to manipulation: a system of self-regulation, tradition-bound and often unchanged for decades with little or no oversight. E-mails and instant messages showed that dealers contributing to the Libor rate-setting pool agreed to make submissions that suited their trading positions, while in foreign exchange, bankers pushed through trades around the window when figures were set. The U.K. introduced criminal sanctions for anyone making false or misleading statements in benchmark-setting.

The Argument

Traders caught up in the rate-rigging probes argue that they were following long-standing banking practices passed down to them, and that they shouldn’t be judged through the prism of today’s more rigorous standards. For their part, banks have tried to paint the problem as the behavior of a few rogue traders. That line rings hollow, as senior managers are alleged to have been involved in rigging both Libor and foreign-exchange rates. With the reputation of bankers tarnished by the financial crisis, regulators and politicians agreed that it’s no longer acceptable for control of key benchmarks to stay in the hands of a few. In 2013, officials from more than 50 countries published a set of principles to make the rates more transparent, including using data from real trades wherever possible, minimizing conflicts of interest and making specific individuals responsible for rate-setting at each firm. Some benchmarks are so widely used in financial markets that they can’t be changed without invalidating existing contracts or introducing greater volatility. 

The Reference Shelf

  • A QuickTake Q&A on the death of Libor and what U.S. regulators are proposing to replace it.
  • An excerpt from "The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number" by Bloomberg reporters Liam Vaughan and Gavin Finch (Wiley, December 2016).  
  • A September, 2015 Businessweek cover story explored the question: "Was Tom Hayes Running the Biggest Financial Conspiracy in History?"

  • A Bloomberg News investigation in June 2013 uncovered the potential problems in currency benchmarks, with spikes in rates before the 4 p.m. London fixing.

  • A Bloomberg visual data chart of the global probes into currency benchmarks.

  • Principles for financial benchmarks published by global regulators in July 2013, and the U.K.’s Wheatley Review of Libor.
  • A history of the London Gold Fix, which traces its origins to 1671.
  • The methodology for setting WM/Reuters currency rates.


    First published Dec. 19, 2013

    To contact the writer of this QuickTake:
    Liam Vaughan in London at

    To contact the editor responsible for this QuickTake:
    Leah Harrison at

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