Integrity of Financial Benchmarks

Abstract

This study presents how financial benchmarks have become beacons for the world of economy and finance. Through the example of the Budapest Interbank Offered Rate (hereinafter: BUBOR), the study evaluates the practical applicability of the methods that may be used to prevent or detect attempts at manipulating interbank rates used as financial benchmarks. It points out that a payment systembased financial benchmark model could contribute significantly to eliminating the manipulation risk associated with the fixing of benchmark rates. The author reviews the extent to which the given benchmark (BUBOR) is exposed to potential manipulation attempts in two different periods, each comprising 6 scenarios. He finds that a low interest rate environment and the low standard deviation of the fixing submissions combined with the methodology applied essentially reduced the manipulation potential to almost zero. This also means that in periods of less volatile fixing submissions it is justified and substantiated to reduce the resources spent on supervising and auditing the production process of benchmark rates. Introducing specific methods may prompt an adjustment on the part of the banks contributing to the fixing (panel banks), which may weaken or strengthen the efficiency of the method concerned.