Broken Benchmarks

The Libor Scandal Sets Off a Wave of Probes

Benchmark - large

Imagine a “benchmark” as a notch on a carpenter’s bench used to measure. Simple enough. But what if the carpenter cheated, moving his marks to be able to charge a little more for a piece of lumber? In their role in modern financial markets, benchmarks set by traders help establish costs for mortgages, gasoline and money itself. They’re hard to understand and easy to manipulate. At the heart of the problem lies an inherent conflict: The figures are determined by the very firms that have the most to gain from where they’re set. Regulators agree that the main financial benchmarks are broken.

The Situation

Nearly seven years of scandals have revealed traders manipulating the numbers to boost their own profits. Banks have started to settle potentially the biggest rate-rigging case — tampering in the $5.3 trillion-a-day currency market, long considered immune because of its sheer size. There are more than a dozen currency probes worldwide, and settling them could cost banks a record $41 billion, Citigroup estimates. U.S. regulators are also examining at least 10 banks as part of an investigation into the benchmarks used to price precious metals like gold and silver. The first investigations focused on fiddling in the London interbank offered rate, or Libor, and came to light in 2008, culminating in record fines for collusion by banks including Royal Bank of Scotland and UBS. E-mails and instant messages showed that dealers contributing to the rate-setting pool agreed to make submissions that suited their trading positions, while in foreign exchange, bankers pushed through trades around a window when figures are set. Benchmarks used in oil and derivatives have also been shown to be vulnerable to abuse, and are being investigated for evidence of wrongdoing. As the probes came to light, several banks banned multidealer chat rooms, the electronic forums used by traders to talk business and exchange wisecracks with their colleagues, customers and counterparts at other firms.

Source: Bloomberg
Source: Bloomberg

The Background

Benchmarks were developed to underpin rates in contracts or to assign standard end-of-day values to particular holdings, and are set by a variety of methods. Libor is based on a daily survey of about a dozen big banks that estimate their short-term borrowing costs. The London gold and silver fixes were set on a private telephone call of a handful of people for decades until the process was overhauled in 2014. WM/Reuters rates, a benchmark for the currency markets, were calculated from the median of trades in a 60-second period until the window was widened to 5 minutes earlier this year. The rate-setting mechanisms share fundamental characteristics that have left them prone to manipulation: a system of self-regulation, tradition-bound and often unchanged for decades with little or no oversight. With the reputation of bankers tarnished by the financial crisis, regulators and politicians agree that it’s no longer acceptable for control of key benchmarks to stay in the hands of a few. In July 2013, officials from more than 50 countries published a set of principles to make the rates more transparent, including using data from real trades wherever possible, minimizing conflicts of interest and making specific individuals responsible for rate-setting at each firm. The U.K. introduced criminal sanctions for anyone knowingly making false or misleading statements relating to some benchmark-setting.


The Argument

Traders caught up in the rate-rigging probes argue that they were following long-standing banking practices passed down to them, and that they shouldn’t be judged through the prism of today’s more rigorous standards. For their part, banks have tried to paint the problem as the behavior of a few rogue traders. That line rings hollow, as senior managers are alleged to have been involved in rigging both Libor and foreign-exchange rates. While regulators are introducing more safeguards, the benchmarks are so widely used in financial markets that they can’t be changed in ways that could invalidate existing contracts or introduce greater volatility. Until the conflicts are cleared completely, traders will still have an incentive to game the system.

The Reference Shelf

  • A Bloomberg News investigation in June 2013 uncovered the potential problems in currency benchmarks, with spikes in rates before the 4 p.m. London fixing.
  • A Bloomberg visual data chart of the global probes into currency benchmarks.
  • Bloomberg Markets article on the Libor scandal and its ramifications.
  • Principles for financial benchmarks published by global regulators in July 2013, and the U.K.’s Wheatley Review of Libor.
  • A history of the London Gold Fix, which traces its origins to 1671.
  • The methodology for setting WM/Reuters currency rates.

(This QuickTake includes a corrected reference to WM/Reuters rates and the time window used to calculate the figures.) 

First Published Dec. 19, 2013

To contact the writer of this QuickTake:

Liam Vaughan in London at

To contact the editor responsible for this QuickTake:

Leah Harrison Singer at