This month saw the fourth anniversary of the 2012 Libor rate rigging scandal. In the same week, three of the former traders behind the scandal were found guilty of trying to manipulate global benchmark interest rates. In the four years between crime and conviction, the Libor scandal is still having a transformative effect on both the sell- and buy-side industries.
It is easy to see why. The way in which traders manipulated the Libor benchmark threatened to fundamentally undermine one of the core pillars of the financial markets: price. In the event the regulators did their job; shutting down the fraud and setting in motion a new regime of greater regulatory oversight. The main outcome is the EU Benchmarks Regulation, which will bring greater transparency and control to the creation of financial benchmarks. But there has also been a significant impact on the buy-side; the scale of which is only now becoming apparent.
The response to the Libor scandal by the EU has been to fundamentally alter the role of buy-side firms in relation to benchmarks. They are no longer passive recipients of benchmark products: asset managers now need to take a proactive role in ensuring these benchmarks are legitimate. Upcoming legislation including MAD II and MiFID II will enshrine this way of thinking into law: buy-side firms will have to take on new responsibilities for market surveillance and reporting.
For some trades the burden on asset managers will be even greater. While the EU Benchmarks Regulation has brought much clarity to the roles and responsibilities of sell-side firms, there remain ambiguities in the wording of the Regulation. These could expose asset managers that create proprietary/bespoke benchmarks, or blend benchmarks on behalf of their clients, to the same rules and regulations as full benchmark administrators.
Four years on from the Libor scandal the buy-side therefore has a significant challenge. If asset managers are to continue to use a full range of benchmarks (including proprietary benchmarks) they must ramp up their data compliance and data management capabilities to levels simply not seen before. It is a challenge they simply must take on if they are to remain competitive.
Managed data service providers such as RIMES can help with this transition by providing data compliance and management expertise and technology as a service; an approach that reduces the total cost of ownership and ensures firms can meet the challenges of new regulations immediately.
RIMES will be discussing the impact of regulation on the buy-side with a range of industry experts on October 6th. Please click here to view the agenda and to register.