Banks Exit Benchmark Reporting

As regulators worldwide search for viable alternatives to LIBOR (and similar benchmark rates), many banks have distanced themselves from these benchmarks already by ceasing to contribute to them. Deutsche Bank, Citi, JPMorgan, UBS and others have all begun moving away from benchmark contributions.

The LIBOR scandal has cost banks over $6 billion in fines and other litigation expenses, prompting many banks to set up internal committees to review rate submission procedures. Many of these internal reviews concluded that participating in various benchmark settings was simply too great of a regulatory/litigation risk for the bank to continue. Investigations into Forex rate fixing continue today, and in light of the ongoing scrutiny of a number of markets, banks have ceased submission to dozens of benchmarks.

Participation in rate submission has always been a voluntary activity for banks, with little financial upside (aside, presumably, from potential manipulation) for doing so. While bank clients, and consumers of financial products in general, benefit from the availability of public benchmarks, the banks themselves gain little. This has made it even easier for various institutions to walk away.

Some of the exits have been quite high profile –  earlier this year investigations began into whether or not the price fix for both gold and silver had been manipulated. Exposure to an additional round of public inquiries caused Deutsche Bank to attempt to sell its seat on the London precious metals fix, and when that failed, it simply resigned. Only four banks remain to set the price of gold, and only two are left to price silver, which hastened silver into a new era in which the price will be set by an algorithm.

Mirroring the regulatory proposals for benchmark rates to be based (to the extent possible) on actual transactions rather than estimates of borrowing costs, the Intercontinental Exchange (ICE) has begun asking banks to provide transaction data that corresponds with their LIBOR quotes. ICE plays a critical role in the benchmark market, having acquired the administration of LIBOR when it bought NYSE Euronext and having been awarded control of the ISDAFix rates related to the dollar, euro, Swiss franc and sterling. These rates are widely used in over-the-counter swap agreements, a market estimated to be worth in excess of $400 trillion. Banks are reluctant to hand over transaction data to justify their quotes, potentially leading to further exits from some key benchmarks.

The danger for market participants is that banks will cease all participation in benchmark setting activities before an alternate system (possibly a mandated and regulated one) is put into place. While investors may feel that the current system can be improved upon, it is still preferable to a situation in which there are no benchmarks available at all. Without a viable reference rate, many markets will cease to function properly. As the number of banks participating in benchmark setting dwindles, it also raises the impact that each remaining bank has on the final fix, potentially making manipulation easier. Regulators have yet to respond to these new issues facing the benchmark market.