Broken Benchmarks

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.

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.