Thankfully, fresh sweeping financial reforms and a new kid on the block are cleaning up a dirty and fundamentally flawed financial system that impacted nearly everyone for years. Since the 1980’s, virtually everything purchased by everybody on credit (a student, car or mortgage loan, for example) has been based upon a system of benchmarks (or marks) devised and run by the largest global banks. In 2008, long before the public knew about massive manipulation attempts at rigging Libor (the London Interbank Offered Rate), I was among a handful who learned of the illegal activity. As part of a stealth investigation, international regulators uncovered a complex cabal of bank traders who endeavored—many times successfully—to manipulate the marks. This amounts to outright stealing from investors and consumers…not to mention undermining confidence in markets.
Four years later, the public started to become aware of the extensive scheme through a succession of global enforcement actions. As the banks bellied up to the bad behavior—paying billions in fines and or settlements—their representatives expressed regret. One bank leader apologized for placing short-term profits ahead of long-term values. Another individual has gone to jail, and others may join. It was, and is still today, a sad account of what can transpire with insufficient regulatory supervision.
While several important reforms became effective in the United Kingdom in 2013 and earlier this year as a result of the Wheatley Review, the European Union (EU) and the United States (US) have been miserably missing in action. In the EU, reform actions have been delayed by intense lobbying and political infighting in Brussels. This included trash-talking about EU regulators’ proposals being “half-baked.” Similarly, many were miffed last year when a Treasury official said the US “…does not plan to adopt direct supervision of benchmarks.” Wha-wha-what?
In recent days, however, we have seen two solid and significant developments that fortunately will create greater confidence and clarity in how such marks are calculated.
ONE: In the US, despite the government’s abdication of primary responsibility, a serious and substantial private sector solution is taking off Friday December 11.This new and exciting progress comes out of the CBOE (NASDAQ:CBOE) and Dr. Richard Sandor (the Father of Financial Futures). The new benchmark is called Ameribor and will be based upon trading at the American Financial Exchange (AFX). Aimed at mid-sized interbank lending, Ameribor is creating a true and transparent market-based US benchmark. AFX and Ameribor operate under clear and concise rules-based standards which will provide needed confidence, clarity and integrity.
TWO: The European Parliament, Council and Commission have finally agreed upon robust and reliable changes that will significantly reduce the risk of benchmark manipulation. The agreement, which now needs to be voted upon by the Parliament, is broadly based upon the work of the international Financial Stability Board (FSB) and the 2012-13 principles developed by the International Organization of Securities Commissions (IOSCO). Specifically, the agreement would ensure benchmark administrators are subject to regulatory pre-authorization and supervision, have appropriate governance standards (including sturdy conflict of interest provisions) and ample transparency about how a mark is actually formulated.
These two recent landmark developments will help move us beyond an utterly horrific history of benchmark abuse. As a result, investors, consumers and all who purchase anything on credit will receive accurate and true pricing devoid of chicanery and mark manipulation.