2017] BENCHMARK REGULATION 1931
measures one or more underlying assets, prices, or other data based on a
formula, value assessment, or market survey.2 Benchmarks are embedded into
a wide variety of financial contracts—from consumer loans to long-term
commodity contracts to complex financial derivatives.3 For example,
derivatives based on the leading interest rate benchmark—the London
Interbank Offered Rate (“LIBOR”)—have an estimated outstanding notional
value of $220 trillion.4 Yet many outside the financial markets were unaware
of benchmarks until the revelation of the LIBOR scandal in 2012.
When a company or consumer is interested in obtaining a loan, LIBOR
is one of the primary benchmarks banks and other lenders utilize to set
interest rates.5 Although it began as a way to estimate borrowing costs among
banks, non-banks and other market actors have adopted LIBOR extensively
throughout the financial markets.6 LIBOR is widely referenced in pricing
derivatives and numerous complex financial instruments, and it impacts
interest rates applicable to everyday consumer loans—such as student loans,
auto loans, and mortgages.7 Given that LIBOR undergirds trillions of dollars
of financial obligations, the presumption is that a central bank or other type
of governmental agency oversees this benchmark, but this is not the case for
LIBOR nor most other benchmarks.8
LIBOR is calculated from the submissions of leading banks estimating
the rate at which they could borrow funds from other banks.9 But, dating back
to (at least) 2007, banks such as JPMorgan, Barclays, and UBS—known as
panel banks—began to exploit their role as input providers to profit from
derivatives that referenced the benchmark.10 To manipulate the benchmark,
2. ONNIG H. DOMBALAGIAN, CHASING THE TAPE: INFORMATION LAW AND POLICY IN CAPITAL
MARKETS 89 (2015); INT’L ORG. OF SEC. COMM’NS, FINANCIAL BENCHMARKS: CONSULTATION REPORT
48 (2013), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD399.pdf. While the term
“benchmark” covers a broad range of m etrics, it is important to specify the scope of this A rticle. First,
the benchmarks analyzed herein exclude those created for public policy purposes such as consumer-
price indices or inflation indices. Second, benchmarks that reflect the value of an investment
portfolio, such as the Standard & Poor’s (“S&P”) 500, are also outside this Article’s scope.
3. See FIN. STABILITY BD., REFORMING MAJOR INTEREST RATE BENCHMARKS 6 (2014),
http://www.financialstabilityboard.org/wp-content/uploads/r_140722.pdf; HOU & SKEIE, supra note
1, at 2–3.
4. FIN. STABILITY BD., supra note 3, at 6.
5. Behind the Libor Scandal, N.Y. TIMES: DEALBOOK (July 10, 2012), http://www.nytimes.com/
6. See Michael J. De La Merced, Q. and A.: Understanding Libor, N.Y. TIMES: DEALBOOK (July 10,
2012, 10:38 PM), https://dealbook.nytimes.com/2012/07/10/q-and-a-understanding-libor.
8. See infra Part II.C.
9. De La Merced, supra note 6.
10. See Understanding the Rate-Fixing Inquiry: The Banks: Global Financial Firms Reach Settlements, N.Y.
TIMES: DEALBOOK (July 28, 2014), http://www.nytimes.com/interactive/2012/07/16/business/