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CFTC's Gensler Says LIBOR Is Based On Fiction, Not Fact

After praising the industry's work to complete 65 final CFTC rules to implement Dodd-Frank, Gary Gensler takes aim at LIBOR and says the industry needs to change.

Gary Gensler, the chairman of the Commodity Futures Trading Commission since 2009, seemed more at ease this year during his keynote address at the Futures Industry Association's Futures & Options Expo in Chicago.

Gensler, who has addressed the FIA Expo for the past five years, spent a good part of his speech highlighting what the CFTC has accomplished, rather than defending his regulatory body's decisions as he had to do in the past. His ease at the podium likely has to do with the fact that the CFTC is the first regulator to completely implement Dodd-Frank requirements, far ahead of the SEC, for instance. The CFTC has issued 65 final rules to enforce Dodd-Frank, Gensler said. "It’s been a remarkable journey these past five years – and all of you have been part of this journey," he said. "It not only took 65 finalized rules, orders and guidances by the CFTC. Your thousands of comments, meetings and questions were a critical part of the process as well. You worked hard – with real costs and against deadlines – to implement these reforms to bring us to a new marketplace."

One of the major accomplishments since the 2008 financial crisis has been the CFTC's efforts to bring transparency to the previously opaque swaps marketplace. "The swaps market also had grown to dwarf the futures market in total notional outstanding," Gensler said. "We now know the swaps market is $400 trillion in size, compared to the $30 trillion futures market." He added, "Foremost, the swaps marketplace now has transparency that simply did not exist in 2008. The public now can see the price and volume of each swap transaction as it occurs. This post-trade transparency spans the entire market, regardless of product, counterparty, or whether it’s a standardized or customized transaction. This information is available, free of charge, to everyone in the public."

Currently, there are 18 swaps execution facilities (SEFs), with a few more looking to get approval in the next few months. SEFs are starting to see an increase in activity, as well. "We now have 18 temporarily registered SEFs where more than a quarter of a trillion dollars in swaps trading is occurring on average per day. That is a big number by any measure," Gensler said.

The Future

Although Gensler hinted that he won't be around much longer as chairman of the CFTC, he did touch on future goals that the regulator must address. He took at aim at LIBOR, saying it is based more on fact than fiction, and called on the industry to drastically reform it, or move to another metric. "We must deal with the fact that LIBOR is more akin to fiction than fact," Gensler said. "Through five settlements the CFTC has brought against banks, we have seen how the public trust can be violated through bad actors readily manipulating benchmark interest rates. As LIBOR and Euribor are not anchored in observable transactions, they have been and can be again readily and pervasively rigged. The work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is critical. This will mean significant changes in the futures and swaps markets."

For instance, Gensler says that close to 70% of certain futures are based on LIBOR. "This will mean big changes in the futures market," he says. "This means that underlying reference [LIBOR] to two-thirds of your market needs to be replaced because it is more akin to fiction than fact. This is huge." Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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