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With charming understatement, Gary Gensler described the financial industry’s reliance on LIBOR and Euribor as “fragile.”
Speaking at the Futures Industry Association’s conference in Boca Raton, Florida on Wednesday, the chairman of the Commodity Futures Trading Commission (CFTC) added:
“I believe that continuing to reference LIBOR and similar benchmark rates is unsustainable in the long run. A reference rate has to be based on facts, not fiction.”
The CFTC was among the first regulators to raise an alarm about LIBOR in 2008, although Gensler noted that in the same year Mervyn King, the governor of the Bank of England, said of LIBOR: “It is, in many ways, the rate at which banks do not lend to each other.” He went on further to say: “[I]t is not a rate at which anyone is actually borrowing.”
Mincing no words, Gensler added that “LIBOR – central to borrowing, lending and hedging in our economy – has been readily and pervasively rigged.”
Barclays, USB and RBC paid a total of $2.5 billion in fines to US and UK authorities, he added. When a reporter asked if any action will be been taken against American banks, Gensler said answering would be breaking the law.
With the European banks, Gensler noted the misconduct took place over several years, in office within multiple countries and included several, even dozens, of people inside the bank reaching into senior management.
Problems with LIBOR continue, Gensler said. Publicly available data like credit default swaps pricing are at odds with LIBOR which often sits unchanged for days or even months.
“How is it that in 2012 – if we look at the 252 submission days for three-month U.S. dollar LIBOR – the banks didn’t change their rate 85 percent of the time?” asked Gensler. “When comparing LIBOR submissions to the same banks’ credit default swaps spreads or to the broader markets’ currency forward rates, why is there a continuing disconnect between LIBOR and what those other market rates tell us?”
That leads to the issue of finding alternatives, which is something of a work in progress.
Gensler said he agreed with a January recommendation from IOSCO that a benchmark “should as a matter of priority be anchored by observable transactions entered into at arm’s length between buyers and sellers in order for it to function as a credible indicator of prices, rates or index values.”
Among the possibilities for use as a benchmark are the overnight index swaps rate, benchmark rates based on actual short-term collateralized financings, and benchmarks based on government borrowing rates, he said.
The transitions would be a challenge, but a new benchmark could run parallel to the old until its value was proven.
“I recognize that moving on from LIBOR and Euribor may be challenging. It may be unpopular. But continuing to support LIBOR and Euribor to maintain stability – particularly as the interbank, unsecured market is essentially nonexistent – may only create more instability in the end.”
