Global regulators will give banks and traders some leeway in compiling financial benchmarks such as Libor, stopping short of US calls for more radical action to stamp out price rigging. The guidance from the International Organisation of Securities Commissions (IOSCO) on Wednesday will cover all benchmarks, which are central cogs in the global economy, from interest rates to equities and gold.
It follows public outrage after banks UBS, RBS and Barclays were fined $2.6 billion in total for manipulating the London Interbank Offered Rate or Libor. Libor, which is used to price over $300 trillion in home loans to credit cards, is based on banks estimating what interest rate they think they could borrow at from another bank.
Gary Gensler, chairman of the US Commodity Futures Trading Commission and co-chairman of IOSCO, has called for Libor to be scrapped as soon as possible and replaced with a benchmark based only on transactions, rather than estimates. Critics of this approach point to the fact that interbank markets dried up at the height of the financial crisis, making it impossible to use actual transactions to compile a benchmark.
Banks say benchmarks based on trades can also be manipulated, while IOSCO's other co-chairman, Martin Wheatley of Britain's Financial Conduct Authority, believes a rapid transition to a transactions-only benchmark is not practical and would disrupt markets. IOSCO's guidance, the first attempt to forge a global approach and avoid conflicting national rules, allows some flexibility and represents a toning down of what was perceived as its initial view that benchmarks should be based only on transactions.
The watchdog said on Wednesday data used to construct a benchmark should be based on prices, rates and indices from an active market but this "does not mean that every individual benchmark determination must be constructed solely from transaction data". It sets out a "hierarchy of data inputs", saying although transactions are the best basis for a benchmark, others such as bid and offer quotes and "expert judgement" can also be used.
The watchdog, comprising regulators from the world's main securities markets, said it will check within 18 months if its members are applying the guidance, which is not legally binding. Critics worry that steps already being taken by Britain, Singapore, Japan, Hong Kong and the European Union - all IOSCO members and required to apply the watchdog's rules - may not mesh together. IOSCO also said it expects oil price reporting agencies (PRAs) such as Platts to stick to a separate set of principles published last October, which kept in place existing practices.
It said it would decide whether to bring oil price PRAs' principles closer to new benchmark guidance when an ongoing review of PRAs' principles is finished next year. IOSCO said its members will also have to adopt rules that make rigging benchmarks an offence, a step Britain and the European Union have just taken.
Gensler said in the IOSCO statement he was pleased that benchmarks will have to be anchored by observable transactions. The appointment last week of US exchange NYSE Euronext as the new administrator for Libor in London may help reassure the United States that serious reform is underway.
The guidance is part of wider benchmark reform efforts by the world's group of top 20 economies (G20) and published to coincide with a meeting of G20 finance ministers in Moscow. The G20's regulatory task force, the Financial Stability Board, has set up its own working group on interest rate benchmarks and reports back next year. It will look at how transition to a more market based interest rate benchmark could work and what to do when markets dry up.