24 September 2012

FT: US regulator calls for faster Libor reform

The top US regulator overseeing the derivatives market has questioned the accuracy of a benchmark interest rate and has argued for quicker reforms, potentially putting him at odds with fellow regulators in the US and Europe.

Gary Gensler, Commodity Futures Trading Commission chairman, told the European parliament on Monday that data compiled by his agency suggested the London interbank offered rate continued to be flawed and needed either radical reform or abolition.

Mr Gensler, in his most forceful public comments to date, detailed ways in which Libor appeared to be divorced from market transactions. “In the last few years there has been a lot of volatility in markets”, Mr Gensler said. “But . . .  Libor has experienced much less severe swings than comparable rates.” “Given that markets are volatile, why is Libor so stable?” he asked. He argued for a new reference rate that was based on observable transactions.

Ben Bernanke, Fed chairman, said in July that replacements would probably be considered “unless, of course, measures are taken to restore confidence in Libor”. The US Treasury said it was “working towards longer-term reforms that favour a transaction-based benchmark where feasible”.

“The problem is that, of course, we have enormous amounts of existing contracts, not just derivatives contracts, but a variety of other kinds of loans and securities which are based on Libor”, Mr Bernanke said. “And until those are negotiated away or they expire, we have this huge legacy issue of Libor-based financial contracts.”

Mr Gensler noted that the lack of unsecured lending between banks could be hindering banks’ efforts to submit accurate rates. He reiterated his call for market participants and regulators to replace Libor with a gauge that relied on observable market transactions.

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