Glossary term
Benchmark Manipulation
Subject: Financial Crime, Market Abuse
Also known as: LIBOR manipulation, Rate rigging, Benchmark rigging
Benchmark manipulation is the rigging of a published reference rate or price, such as an interbank interest rate, by submitting false inputs or colluding, so that contracts tied to it settle in the manipulator’s favour.
Explanation
Benchmarks set the price of huge volumes of loans, derivatives and commodities. Many were once built from estimates submitted by panel banks rather than from real trades. A trader could ask the submitter to nudge the figure up or down to help a derivatives position, or banks could agree to move together. The LIBOR scandal, uncovered around 2012, led to large fines and criminal cases and to the rate being replaced by ones based on actual transactions. The same abuse has been found in foreign exchange fixings and commodity price assessments. Controls now include rules on how submissions are made, separation of submitters from traders, recording of communications and regulation of benchmark administrators. One skewed fixing shifts payments on millions of contracts at once, from mortgages to swaps.
Example
On a rates desk, one trader holds a large position that gains if a reference rate rises. He messages a colleague who submits the bank’s daily rate estimate and asks for a slightly higher figure. Chat records later show the pattern repeating over months. The bank pays a penalty, dismisses those involved and moves submissions to a team with no link to trading.
Not to be confused with
- Price Fixing
- Competitors agreeing prices for goods or services; benchmark manipulation distorts a published reference rate that other contracts rely on.