Interbank lending rates may no longer be a suitable input
for financial benchmarks, the US Commodity Futures Trading
Commission (CFTC) chairman
In the wake of last years rate-fixing scandal, a move
to base benchmarks on real and transparent transaction data was
But interbank lending data may therefore not fit the bill,
as banks often go through periods in which they do not
The CFTCs Gary Gensler, the keynote speaker at last
weeks Global Financial Markets Association (Gfma)
conference on the future of financial benchmarks, said a banker
at one major financial institution had recently told him his
bank was not going to lend over 30-day periods, even if the
markets came back, given the new Basel rules.
Thats the challenge we have, Gensler said.
Its a question of whether there [are] no
transactions for months and years at a time.
Gensler believed other rates could serve as better inputs
for a benchmark based on transaction data. He cited the
overnight index swaps rate, rates based on short-term
collateralised financings and benchmarks based on government
borrowing rates as possible alternatives to interbank lending
In addition to real transactions, one can look at
actionable bids and actionable offers in a marketplace in times
when there hasnt been a transaction, Gensler said.
I dont think one needs continuous
A recent International Organization of Securities
Commissions (Iosco) consultation
report on financial benchmarks recently warned contracts
citing benchmarks like the London Interbank Offered Rate
(Libor) should have a contingency plan in the event of market
stress or absence of reliable data.
So as to account for those contracts without a contingency
plan, Gensler advised running a new benchmark to run in
parallel with its existing counterpart for a certain period
before completely abolishing the old benchmark.
The market does have some experience with transition,
albeit for smaller contracts such as in the energy and shipping
rate benchmarks, he said.
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