Banks pull out of dozens of benchmarks after rate-rigging scandals (FT 1 October 2014, by Daniel Schäfer in London)
Some of the world’s largest banks have stopped contributing to dozens of financial benchmarks to avoid further litigation risk in the wake of the Libor and foreign exchange rate rigging scandals. Deutsche Bank, Citigroup, JPMorgan and UBS, among others, have set up task forces to scrutinise submission processes for hundreds of benchmarks in everything from commodities to interbank lending as they seek to cut their litigation and regulatory risk, several people close to the situation said. The withdrawals have already helped speed up revamps of the silver and gold fixes and reforms to some interbank lending benchmarks so that they are based on actual transactions rather than bank submissions.
But investors warned the crackdown could leave less liquid markets without any benchmark at all and make it impossible to determine whether they are getting fair prices on their derivatives and good returns on their investments. “If you have fewer and fewer submissions there is the potential that some of these benchmarks will just go away,” said Klaus Paesler, head of currency in Europe at Russell Investments. “Benchmarks are important for investors because you need to measure your performance against something.”
The policing efforts highlight top bankers’ elevated anxiety that their institutions could become embroiled in another high-profile scandal on the scale of Libor and forex, which are each expected to cost the sector billions of dollars in fines and other legal bills. Banks have already paid more than $6bn for wrongdoing in the Libor rate manipulation scandal, and analysts at Morgan Stanley estimate that the probes into the alleged rigging of a crucial forex fix will cost several of the key US and European banks $1.5bn to $2bn in fines.
For banks, most submissions to benchmarks are costs rather than a revenue generating activity. While the indices help clients with the measurement of their performance, the elevated litigation risk has prompted bankers to question the benefits of providing such services. Deutsche Bank, for example, launched an internal “benchmark submission oversight” committee in 2012 when the Libor scandal broke out in full force. The German group initially only looked at Libor and forex but has since expanded the committee’s remit to include every benchmark or benchmark-like product across geographies and asset classes – from commodities to exchange traded funds and mutual funds. Deutsche has stopped contributing to dozens of benchmarks in the past two years.
“We catalogue all the things that we submit to, and where we cannot ensure the level of rigour and robustness that we would like, we exit,” one person close to the work of the committee said. Deutsche’s very public exit from the gold and silver fix panels helped accelerate overhauls of those benchmarks. The silver fix has recently moved to an electronic system where computer algorithms instead of bankers set the price, and the gold fix is expected to follow suit.
Swiss rival UBS has similarly created a “benchmark submission team” within its treasury department. Removed from the trading units (where submitters used to sit), the team is responsible for all of the bank’s benchmark submissions. The team has opted to exit numerous benchmarks. US banks Citi and JPMorgan have also ended their submissions to dozens of rates.
The Euribor interbank lending rate panel saw an exodus of contributors including UBS and Citi last year. The Libor rate-setting process also is in the middle of being changed to a more transaction-based system. Last week, the UK government launched a proposal to bring seven key financial market benchmarks – including for oil and forex as well as the swaps index Isdafix – under formal regulatory oversight as well as making their manipulation a crime. European lawmakers are also working on ideas for a stricter regulation of benchmarks, while the Financial Stability Board, a powerful global regulatory umbrella body, has this week made proposals to reform a key forex benchmark.