Benchmark Rate Reform: Orderly Transition Or Potential Chaos And Confusion?

Keywords: Benchmark rate reform, LIBOR, IOSCO

In the wake of several widely reported LIBOR and other benchmark rate manipulation scandals, reflected in headline-grabbing stories of litigation and official inquiries and investigations,1 followed in some cases by eye-popping related settlements,2 policymakers have responded with varied attempts at benchmark rate reforms, which as of early April 2013 remain a work-in-process. Notably, the International Organization of Securities Commissions (IOSCO), which issued a consultative paper in January 2013 that received more than 55 comments, is expected in the near term to announce its global guidelines for benchmarks, including standards for governance, regulatory oversight and dealing with conflicts of interest.3

Probably the most important pending benchmark rate reform as a practical matter is the implementation of the Final Report of The Wheatley Review of LIBOR and its 10-point plan for comprehensive reform of LIBOR (Wheatley Plan).

The value of potentially affected transactions (estimated in the Final Report to be in excess of $300 trillion) affirms the importance of appropriate LIBOR reform as well as the need to implement that reform in a way that does not unduly disrupt affected transactions or the related market. Unfortunately, some early practical experience with the implementation of point #6 of the Wheatley Plan - requiring that the British Bankers Association (BBA) cease compiling and publishing LIBOR for those currencies and tenors for which there is insufficient trade data to corroborate submissions - provides evidence that suggests market participants face a real risk of disruption.

Consistent with the Wheatley Plan, secondary legislation came into force in the United Kingdom amending the Regulated Activities Order and making the "administering of, and providing information to, specified benchmarks" a regulated activity under the UK Financial Services and Markets Act 2000. Currently, the only specified benchmark is BBA LIBOR. Although recently reported investigations of possible manipulation of the ISDA swap rate4 suggest that others soon may be added.

Also, as contemplated by point #6 of the Wheatley Plan, the BBA, after public consultation, announced in late 2012 a timetable for the discontinuance of compilation and publication of LIBOR for certain currencies and maturities (see Annex 1 to the BBA feedback statement), including a complete discontinuance of BBA LIBOR quotations for...