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LIBOR Likely Not Only Benchmark Manipulated: Regulators

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A group of international securities regulators has said that LIBOR may not be the only benchmark to have been compromised by manipulation, thanks to leeway in how those benchmarks are determined.

Bloomberg reported Thursday that in a confidential International Organization of Securities Commissions (IOSCO) discussion paper, fewer than half the benchmark interest rates examined in the U.S., Europe and Asia were arrived at via actual transactions. Instead, the organization found the processes unclear, seldom regulated and lacking in transparency.

Since the June conflagration after Barclays agreed to pay a $480 million settlement over LIBOR fixing, more banks have come under investigation, including UBS, Citigroup, Royal Bank of Scotland and Deutsche Bank as regulators have worked to determine if traders coordinated their banks’ submissions to LIBOR so that they could boost profits from derivatives positions.

In a Sept. 14 statement, Masamichi Kono, chairman of the IOSCO board, had said, “IOSCO, as the international organization of financial market regulators, is firmly committed to restoring confidence in benchmarking activities globally.” The discussion paper revealed, among other things, that approximately 80% of benchmarks were compiled by either associations or private entities.

The discussion paper indicated that survey-based benchmarks, such as LIBOR, were sometimes reached via subjective criteria that were open to individual interpretation. In cases in which benchmarks were based on actual transaction data, the entities compiling them still have discretion over whether to produce actual rates or prices.

In part, the authors of the paper wrote, “The risk of manipulation will be greater where participants in the process have both incentive and opportunity to submit inaccurate data or apply a methodology inaccurately. Furthermore, where judgment is required in determining the data to be submitted, the problem is particularly acute.” They continued, “Presently, there is little evidence that the current scope and severity of global sanctions regimes provides effective deterrence.”