CFTC's Gary Gensler calls for Libor to be based on 'actual observable market transactions'

The Wall Street Journal reports that the CFTC's Gary Gensler has called for Libor to be based on 'actual observable market transactions'.

Regular readers know that the only way to achieve this is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants have the data they need to base Libor off of actual observable market transactions.

With this information, market participants have the data they need to assess the risk of each bank and unfreeze and keep unfrozen the interbank lending market so that there are actual observable transactions on which to base Libor.

To insure that Libor can be trusted going forward, the data should be collected in a data warehouse that is coordinated and overseen by an independent third party that has no conflicts of interest with any of the current participants in the financial system.

This independent third party's role will be to ensure the accuracy, accessibility and usability of the data.

The London interbank offered rate, or Libor, remains vulnerable to bank misconduct and should be replaced, Commodity Futures Trading Commission Chairman Gary Gensler said Monday. 

Libor, which serves as the basis for interest rates on trillions of dollars of financial contracts, is based on banks' costs of borrowing from other banks. But Mr. Gensler, in a speech to the European Parliament, said a disconnect between Libor and other market indicators that measure borrowing costs signals that Libor may still be subject to manipulation. 

If so, that would suggest a broader scope for authorities investigating the manipulation of the benchmark interest rate. The CFTC and others have so far focused predominantly on alleged rigging that occurred between 2005 and 2009. 

Mr. Gensler called for Libor to be tied to observable market transactions, not on banks' estimates of their borrowing costs, or for a new benchmark rate to be introduced. 

"It is time for a new or revised benchmark—a healthy benchmark anchored in actual, observable market transactions—to restore the confidence of people around the globe," Mr. Gensler said. "There are no rules requiring controls, firewalls, independent testing, policies and procedures, or a methodology ensuring that submissions are transaction-focused, as the benchmark was originally intended," he said.