* Global watchdog set to unveil final guidelines next week
* Singapore, Hong Kong already pursuing their own reforms
* United States and UK disagree over future of Libor
* Huge FX market difficult to regulate
By Anirban Nag and Rachel Armstrong
LONDON/SINGAPORE July 12 A global blueprint
intended to stamp out manipulation of financial benchmarks,
expected to be published late next week, risks failure if
individual countries persist in pursuing their own regimes.
Regulators are expected to unveil final guidelines for
improving transparency and oversight of benchmarks covering
everything from interest rates to oil and gold.
But the Madrid-based International Organisation of
Securities Commissions (IOSCO) has no power to enforce its
recommendations and with Hong Kong and Singapore already forging
ahead with their own proposals, the signs are that
implementation will be patchy.
"There is no global regulatory trade body with a mandate
strong enough to demand a country change its implementation of
the principles which are, by nature, subject to interpretation,"
said Tom White of JWG, a UK-based regulatory think tank.
This could result in different regulators taking different
approaches, leaving weak spots in the system that could be
exploited, he said.
Trust in financial industry benchmarks, central cogs in the
global economy, has been shattered by revelations last year that
traders had routinely manipulated the London interbank offered
rate (Libor), used to help price some $550 trillion in contracts
worldwide, from Spanish mortgages to U.S. credit card bills.
European authorities are also investigating allegations of
price rigging in the oil market and in Britain, the financial
regulator is looking into allegations that traders rigged
benchmark rates on the $5.6 trillion-a-day foreign exchange
Despite influencing trillions of dollars worth of contracts,
many of the world's benchmarks are unregulated and determined by
people who can profit from their levels.
To minimise the risk of manipulation, IOSCO indicated in
April that it would like benchmarks based on actual
transactions, where possible, rather than estimates. It also
sought more protections for whistle-blowers, a code of conduct
for individuals who submit figures for benchmarks and stronger
policing of institutions that compile and administer rates.
IOSCO's final report will be used by the Financial Stability
Board, an influential regulatory group headed by Bank of England
governor Mark Carney, to oversee reform of benchmarks in the
But the FSB will not report back until next year and by
then, it may be too late to get individual countries to change
reforms already introduced.
ASIA VS EUROPE
Using actual market transactions rather than estimates to
calculate benchmarks, as IOSCO wants, is tough in illiquid
Trading in the interbank market has dried up since U.S.
investment bank Lehman Brothers collapsed in September 2008 with
banks preferring instead to rely on deposits or cheap loans from
central banks to fund their loans.
Regulation also risks undermining a benchmark if it puts
banks and trading houses off making the submissions needed to
Trading volumes in Singapore's once-vibrant interest rate
and emerging market currency trading desks are way down
following probes into rate-fixing and brokers and analysts
interviewed by Reuters said volumes would struggle to recover
any time soon.
After uncovering rate-rigging by more than 100 traders,
Singapore has made benchmark manipulation a criminal offense and
the city state will now regulate the setting of key benchmarks
such as Sibor, the Singapore interbank offer rate.
It will discontinue six benchmark rates and four of the
remaining five will be based on actual trade data in the foreign
exchange market. Sibor will continue to be based on estimates
submitted by banks.
In Hong Kong, the city's de facto central bank has awarded
the administration of the interbank lending process to an
industry group headed by its own chief executive and said it
would phase out interbank rates with little demand.
In Japan, where some bank branches were found to be at the
heart of the Libor manipulation cases, the country's banking
industry group said it will tighten monitoring of how its
interbank lending rates are set.
Regulators in Europe are considering a more radical
In Britain, authorities are replacing banking trade body the
British Bankers Association (BBA) as the administrator of Libor
with NYSE Euronext, the transatlantic exchanges
The British regulator wants NYSE Euronext to look at ways of
tying the Libor rate more closely to actual transactions.
The UK regulator has suggested running a parallel system -
one based on bank estimates to support existing contracts and a
transaction-based rate for new contracts. But the United States,
which wants to ditch the use of estimates altogether, may insist
on a transaction-based benchmark for rates used there.
Thomson Reuters, parent of Reuters, has calculated
Libor and distributed the rates on behalf of the BBA since 2005.
In Europe, the authorities are looking at making submissions
for interbank rates mandatory as a growing list of international
banks, including Citi, UBS and Rabobank
, have stopped participating in the calculation of
Euribor, the European equivalent of Libor.
Euribor might also be phased out and replaced with a
'hybrid' rate which would combine actual transaction prices with
estimates to ensure the rate was a valid yardstick when market
volumes are weak, people familiar with the plans said.
Even with traded prices underpinning the benchmark,
investors may still be wary.
In the spot foreign exchange market, allegations that banks
were using advance knowledge of client orders to try and
manipulate the WM/Reuters benchmark rate, used by investors and
companies to value their holdings, has prompted an investigation
by authorities in the UK.
Traders said trying to regulate the currency markets would
prove difficult given their large size.
"This market is so huge with all kinds of players ranging
from Asian central banks to large hedge funds that you will not
see anyone sticking to a code of conduct. You can have a code of
conduct, but the market will chase liquidity (for better
prices)," said a head FX trader at a London-based hedge fund.
Some investors have long suspected that they were being
short-changed by banks in the foreign exchange market, where
rates are calculated hourly and the closing rate is calculated
at 4 pm in London.
To get around that, asset manager Russell Investments opened
its own FX desk over a decade ago.
"There's no other market in the world where such large
trades are known hours before they are executed. When we trade
equities, we go to extreme lengths so no-one knows what our
actual trade size is - we will slice it and dice it and use 100
different venues to disguise how much we are trading," said
Daniel Birch, head of implementation services at Russell
Investments in Sydney.
"If you are an FX trader and you are fixing at the London
4pm you get orders from Australia, New Zealand, Japan, and Hong
Kong that are on your desk for up to eight, nine hours before
you execute at the 4pm. So the potential incentive for FX
traders to manipulate this information can be very high."
World Markets Co, a unit of Boston-based State Street Corp.
, is the administrator for the WM/Reuters service.
Data from Thomson Reuters systems are a primary source of
the exchange rates used to calculate the benchmarks. World
Markets applies its methodology and calculates the benchmark.