In light of the recent London Interbank Offered Rate scandal, regulators and executives in the financial institution have come to realize that benchmarks may be more vulnerable to manipulation than they fully realized. In order for similar scandals to not occur, banks need to put a greater focus on automation, according to industry insiders.
Experts recently told Forbes that there’s an “urgent need” for banks to introduce automated calculations that are based on real market data, not estimates, to stave off another incident in which benchmarks are tampered with.
Chris Skinner, chairman of a networking group, told Forbes that it isn’t just a matter of if automation should be implemented but when, as regulators will at some point compel firms to do it in order to advance compliance management. He added that in the past, the setting of rates for the Libor have been based on estimates. Given the vulnerability of the benchmark to potential manipulation, hard data will have to be utilized moving forward.
Ralph Silva, a financial industry analyst, told Forbes that despite the headlines that the Libor scandal has made across the country, some banks still aren’t taking the issue as seriously as they ought to be, in terms of learning from it and implementing the types of actions that can prevent a similar event. This may be because the reforms suggested aren’t compelling enough for banks to effectuate them from a perspective of cost-benefit analysis.
“Many will see the potential costs and integration timetables, and say there is little incentive, in spite of some of the good work being done by developers and industry experts,” Michael Mainelli, director of the Z/Yen think tank, told the business news source. “It’s disappointing, because our industry is one of the easiest to automate, given the fact we already have the data.”
16 banks implicated in Libor affair
Greater attention has been paid to the world’s benchmarks in the wake of the Libor scandal. In mid-March, the Federal Deposit Insurance Corporation sued 16 banks, accusing them of fraud and conspiracy. The alleged rigging is believed to have taken place from August 2007 until June 2011. Some of the companies accused opted to settle out of court, avoiding trial proceedings, according to multiple media sources.
Martin Wheatley, chief executive for the United Kingdom’s Financial Conduct Authority, said he will soon look at what types of steps banks have instituted since charges were filed.
“Following widespread attempted manipulation of Libor, firms should ensure that traders are not able to act in this way in the future,” said Wheatley, according to The Wall Street Journal. “We are determined that firms need to take the matter of manipulation of any benchmark seriously and will be working with firms to seek out any issues that may remain.”