CFTC chairman outlines Libor alternatives

Author: | Published: 4 Mar 2013
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Interbank lending rates may no longer be a suitable input for financial benchmarks, the US Commodity Futures Trading Commission (CFTC) chairman has said.

In the wake of last year’s rate-fixing scandal, a move to base benchmarks on real and transparent transaction data was widely supported.

But interbank lending data may therefore not fit the bill, as banks often go through periods in which they do not lend.

The CFTC’s Gary Gensler, the keynote speaker at last week’s 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.

“That’s the challenge we have,” Gensler said. “It’s a question of whether there [are] no transactions for months and years at a time.”

The alternatives

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 rates.

“In addition to real transactions, one can look at actionable bids and actionable offers in a marketplace in times when there hasn’t been a transaction,” Gensler said. “I don’t think one needs continuous transactions.”

Contingency plans

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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