Reforming Financial Benchmarks
In recent years a number of concerns have been raised regarding the integrity and reliability of major financial market benchmarks, particularly interest rate and foreign exchange (FX) benchmarks.
Major interest rate reference rates (such as LIBOR, EURIBOR, and TIBOR) are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts. The cases of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates. Uncertainty surrounding the integrity of these reference rates represents a potentially serious source of vulnerability and systemic risk. Against this background, the G20 asked the FSB to undertake a fundamental review of major interest rate benchmarks and plans for reform to ensure that those plans are consistent and coordinated, and that interest rate benchmarks are robust and appropriately used by market participants.
The FSB has worked with authorities and standard-setting bodies to develop reform proposals for these benchmarks. In July 2013 the FSB established an Official Sector Steering Group (OSSG), which comprises senior officials from central banks and regulatory agencies, to focus the FSB’s work on the interest rate benchmarks that are considered to play the most fundamental role in the global financial system. The FSB published its recommendations on interest rate benchmarks in July 2014.
Similar concerns have also been expressed regarding FX benchmarks, stemming in particular from the incentives for potential market malpractice linked to the structure of trading around the fixings for these benchmarks. As a result, the FSB established a working group to undertake analysis of the FX market structure and incentives that may promote particular types of trading activity around the benchmark fixings. The group was tasked to propose possible remedies to address these adverse incentives as well as to examine whether there is a need and scope to improve the construction of the benchmarks themselves. The FSB published its recommendations on FX benchmarks in September 2014.
As part of its work in this area, the FSB has endorsed the Principles for Financial Benchmarks developed by IOSCO, which cover the important issues of benchmark governance, integrity, methodology, quality and accountability. In its reviews of interest rate and FX benchmarks, the FSB requested that IOSCO undertake an assessment of relevant benchmark providers against these principals, and the results of these assessments have formed a key input in the FSB’s recommendations in this area.