Facing market manipulation scandals involving financial benchmarks, policymakers are working to bolster the governance and oversight of these metrics to shore up trust in the financial system, says Bank of Canada deputy governor, Timothy Lane.
In a speech Monday to the Osgoode Hall Law School and Schulich School of Business in Toronto, Lane examined efforts to restore confidence in financial benchmarks in the wake of the scandals involving the manipulation of LIBOR, and ongoing investigations into possible misdeeds in foreign exchange markets too. These scandals have damaged investor trust, and brought the integrity of the overall financial system into question, Lane suggests,
He notes that LIBOR investigations have already resulted in large sanctions for both financial firms and traders, and he says that allegations of collusion in forex markets are “being taken very seriously.” To address the loss of trust that has followed these revelations, Lane says that policymakers are looking at both reforming existing benchmarks and replacing them.
Last year, the Financial Stability Board (FSB) established a steering group of regulators and central banks to help review existing benchmarks, and to examine the feasibility of developing alternative benchmarks, he notes. “When this work is complete, its findings will help inform views as to possible alternative financial benchmarks in other currencies, including the Canadian dollar. Similar international work has recently been launched to examine foreign exchange benchmarks,” he notes.
In Canada, regulators are looking to bolster governance for the main benchmark for Canadian-dollar interest rates, known as the Canadian Dealer Offered Rate (CDOR), he notes; adding that, a review of CDOR governance by the Investment Industry Regulatory Organization of Canada (IIROC) found that independent compliance oversight of rate setting needed to be strengthened. “Action is now underway, both by the official community and industry, to address the issues highlighted in the review,” he says.
Additionally, he says, the banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has announced its plans to supervise the effectiveness of governance and risk controls surrounding banks’ CDOR submission processes; the latest federal budget included plans to introduce a regulation-making authority in the Bank Act covering bank submissions to financial benchmarks; and, he says that the banks on the CDOR panel will soon release a code of conduct that they have developed along with IIROC and the Bank of Canada, which will specify minimum standards for submission methodology, internal oversight and records retention.
“Work continues to strengthen other aspects of the governance of CDOR to meet the principles established by [the International Organization of Securities Commissions (IOSCO)],” he adds. “For instance, we have discussed with industry the need for it to establish more formal administrative arrangements for CDOR, and the industry has begun work to take this forward.”
As for other Canadian benchmarks, Lane says that work has begun to look at whether any changes to the Canadian Overnight Repo Rate Average (CORRA) may be needed, given new standards from IOSCO.
In terms of foreign exchange rates, Lane notes that, “While there is no evidence of market manipulation affecting the Bank of Canada’s rates, we are reviewing these rates and considering any changes that may be appropriate. We will examine how these posted rates are currently used by market participants to see how any possible changes could affect market functioning.”
Ultimately, good governance is required to maintain trust in financial contracts, Lane says. “The introduction and implementation of the IOSCO benchmark principles will help ensure greater integrity and governance for financial benchmarks. Here at home, better articulated governance arrangements for CDOR and other important financial benchmarks will contribute to greater financial stability,” he concludes.