NYSE Euronext is to become the new administrator of the capital markets most important interest rate benchmark, the London Interbank Offered Rate (Libor), in early 2014. In July the operator of the New York Stock Exchange won a competitive tender run by a new regulatory agency formed by the UK government to restore confidence in Libor following revelations that dealers were rigging the British Bankers Association-managed rate to bolster credit confidence during the crisis.
|NYSE Liffe CEO Finbarr Hutcheson|
NYSE Liffes position as a big trading venue for interest rate derivatives would appear to give it an incentive to add Libor administration to its growing portfolio of business lines, and Hutcheson is quick to address concerns of conflict of interest. "NYSE Euronext Rate Administration Limited will have an autonomous board, which will operate independently from the exchanges derivatives business," he says.
With 16 dealers currently under investigation for fraudulent Libor submissions, and $2.5 billion of combined fines already imposed, the susceptibility of self-regulated benchmarks to systematic abuse has been an important regulatory and public concern. Public disclosure of emails and instant messages indicating collusion among contributing banks focused the early debate on observable market rates, with some participants, most notably Commodities & Futures Trading Commission chairman Gary Gensler, calling for authorities to replace Libor with a variant of an overnight indexed swap (OIS).
However, the conversation has since moved on with the publication of the International Organization of Securities Commissions final principles for financial benchmarks published on July 17. Co-chaired by Gensler and Martin Wheatley, managing director of the Financial Services Authority and CEO-designate of its replacement as UK financial services regulator the Financial Conduct Authority, IOSCO states that while benchmarks "should be based on prices, rates, indices and values that have been formed by the competitive forces of supply and demand and anchored by observable transactions," it does not insist that benchmarks must be based only, or even predominantly, on transaction data.
Hutcheson acknowledges that the main challenge for NYSE Euronext is now pinning down exactly what that means. "The main challenge will be ensuring that the rate is anchored to market data, without changing Libor as a quoted offered rate. However under the new agreement, the rate would be calculated by submissions received from banks, and corroborated by transaction data. It is anticipated that by supporting the banks self-reporting with transaction data, it will help further mitigate the risk of the rate falling prey to manipulation," he tells Euromoney.
He adds: "As well as the corroboration through the use of transaction data, our mandate to administer Libor, with improved regulatory provisions, includes the setting up of an oversight committee to establish a code of conduct on how banks submit their rates."
Nonetheless, regulatory compliance might turn out to be a headache for the new administrator. NYSE faces three centres of gravity in emerging benchmark regulation: the Wheatley Review of Libor, the IOSCO principles for benchmarks and the European Union Benchmark Regulation currently in the legislative process. In the context of this regulatory turf war, Libor rules might continue to evolve over the next few years.
Although Wheatley published his report in September 2012, and IOSCO final principles are now known, the potential for the European Union to throw a spanner in the regulatory works is very much a live issue. A draft legislative proposal leaked in early June set out sweeping provisions applicable to interbank interest rate and commodity benchmarks, which, if adopted, would apply to benchmark administrators, benchmark contributors, national competent authorities and the European Securities and Markets Authority (Esma).
"While the draft proposal is likely to change through the ongoing internal review by the European Commission, I would expect most provisions to appear in the final draft legislation, due for release on September 14," says Conor Foley, a Brussels-based lobbyist representing various derivative markets and market participants. "I see significant potential for conflict between the current guidelines and forthcoming European legislation. The Commission generally sees the IOSCO principles as too loose. There is broad support in Brussels for the Wheatley-led changes to Libor, but one key point of dispute is who should supervise Libor? The leaked draft proposal indicates that the Commission sees supervision of such essential benchmarks as a Union competence and a job for Esma," Foley says.