After the financial crisis in 2008-09, regulators across the globe set in motion a complete overhaul of the financial markets, with the ultimate goals being transparency in the previously unregulated swaps market, and ensuring that there is adequate collateral backstopping the sector in the event of financial shock. The top items on the list were central counterparty clearing of swaps, the exchange of initial and variation margin among parties to non-cleared swaps, and the reporting of trade data to central repositories, so that market overseers can identify risks that may be building in the system.
Concurrent with the regulatory overhaul in progress, a scandal surrounding the manipulation of the London Interbank Offered Rate (LIBOR) and other financial benchmarks came to light.
LIBOR, the interest rate that banks charge each other to borrow short-term on the London interbank market, is the broader financial world’s benchmark for setting short-term interest rates for products like variable-rate mortgages and corporate loans. The rate was generally set by obtaining a daily set of quotes from a reference panel of bankers, given their supposed perception of fair value. Because the mechanism was based on observed rates rather than actual transactions, it was possible for participants to skew submissions. LIBOR manipulation allegations became especially acute during the financial crisis in 2008 and 2009, as numerous institutions were having difficulty obtaining short-term funding.
Since the scandal broke, numerous fines and settlements have been assessed, against firms including banks such as Barclays, UBS, Royal Bank of Scotland and brokers such as ICAP. Also, reports of manipulation surrounding other financial benchmarks such as EURIBOR and certain energy indices, have surfaced.
Changes are being made, including changes to the LIBOR rate-setting mechanism, as well as proposals for new benchmarks to replace LIBOR.The International Organization of Securities Commissions (IOSCO) released a consultation paper in April 2013, Principles for Financial Benchmarks, which seeks public comments on a set of high-level principles for benchmarks used in global financial markets. In September 2013, the European Commission proposed a set of rules on financial benchmarks.
Robert Pickel, long-time ISDA CEO, has worked to promote and advocate for OTC market participants and work with international regulatory bodies to harmonize regulation across jurisdictions. Pickel spoke with John Lothian News editor-at-large Doug Ashburn about the future of LIBOR and other financial benchmarks, possible alternatives to LIBOR, and how ISDA will work with regulators to smooth out and harmonize benchmarking standards.