Wednesday, November 12, 2014

Benchmarking data called into question

FX fines undermine validity of bank-provided financial rates


Author: Ed Blount

Convenience and low cost have always been the prime motives for customers to use bank-provided benchmarks in their portfolio analytics. That user model, shaken by the Libor scandal, now seems upside down after US, UK and Swiss regulators fined 5 major banks more than US$3 billion for rigging FX rates in London.  

"Countless individuals and companies around the world rely on these rates to settle financial contracts," said Aitan Goelman, the CFTC’s Director of Enforcement, in a statement, "and this reliance is premised on faith in the fundamental integrity of these benchmarks. The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation by some of the biggest banks in the world.”

Top-down benchmarks are provided by banks for many services, although those in FX and LIBOR markets are among the largest sectors. For instance, agent banks in the securities lending markets offer reviews to their customers through data providers who consolidate reports from the major agents each day. Concerns have always existed that certain loans or accounts may have been left out of the data feed, thereby affecting the benchmark calculations. 

By contrast, bottom-up benchmarks based on customer reported activity can give more defensible analytics, especially if needed for a court-ordered review of lending program fees or relationships. Going forward, bottom-up benchmarks may displace the banks' own rate reporting. 

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