DESIGNING THE FUTURE
BENCHMARK SYSTEM — LIBOR, FROM SCANDAL TO REFORM
In recent years due to a huge scandal in the financial sector involving the biggest banks around the world the whole benchmarks system (primarily Libor) has been questioned as a reliable measure of true borrowing costs in the market. Libor manipulations influenced the global economy and resulted in creating distortions and mispricing in financial markets. The questions we might ask are: what were
central exchange. These markets are extreme-
the reasons for benchmark manipulation? Were
ly important to the economy, and cover a wide
the procedures always present or is it banks’ re-
range of financial instruments, including bonds,
sponse to the financial crisis? And what is the fu-
currencies, commodities, and derivatives. Some
ture of the discredited system of reference rates?
of the key issues are market transparency, legal
To understand the crux of the matter we talked to
treatment in bankruptcy, collateral, mechanisms
a great authority on the topic and one of the most
for price negotiation, systemic risk, and the role
influential financial economist of his era professor
of central clearing parties and market trading
Darrell Duffie, Dean Witter Distinguished Pro-
platforms. This is a relatively open and „young”
fessor of Finance at the Graduate School of Busi-
area of research, and extremely interesting.“
ness, Stanford University. Currently he is chairing the Market Participants Group established by the
Benchmark overview
Financial Stability Board - an international or-
So what is a benchmark? In the simplest terms
ganization responsible for coordinating the work
benchmark is a point of reference. It facilitates
of national financial authorities, supervising the
comparison of investment performance. Exam-
financial sector, and lately the reform of the bench-
ples of benchmarks may include quantities like
mark system. The recommendations of the Market
stock exchange indexes, T-bills or the inflation
Participants Group might be crucial for determin-
rate, depending what we are up to compare.
ing the future of Libor. Prof. Duffie, apart from his
The role of benchmarks in financial markets is
key role in the reform of the benchmarks system, is
more precisely described by Prof. Duffie:
one of the world top experts on OTC markets whose
“Benchmarks are used mainly to provide legal-
performance is strictly linked to the reliability
ly enforceable price data for the purpose of set-
of reference rates. We asked Prof. Duffie to de-
tling contracts. For example, if I promise to pay
scribe his recent research interests in more details:
you on March 18 the value in Euros on that day
“I am studying, with various collaborators,
of 10 million U.S. dollars, it is helpful to insert
the design and behavior of over-the-counter fi-
the phrase in our contractual agreement that the
nancial markets, those for which there is no
exchange rate shall be as determined in the daily 54