That said, I also believe that more work remains to be done to broaden the definition of LIBOR so that it represents the reality of new funding patterns for banks, and to also tie submissions more closely and systematically to observable transactions. A second notable development was the publication of an international set of principles for financial benchmarks developed by the International Organization of Securities Commissions9 (IOSCO) in 2013. These principles include a set of 19 specific standards across governance, benchmark quality, methodology and accountability that have emerged as the international standard. IOSCO has rightly focused on tying benchmarks more closely  8  The Wheatley Review of LIBOR: Final Report. 9  Principles for Financial Benchmarks: Consultation Report, International Organization of Securities Commissions. BIS central bankers’ speeches  5  to observable, arms-length transactions. While a pure transactions-based rate will not solve all problems for all benchmarks, this is an important step toward eliminating excessive reliance on expert judgment. As part of the international reform efforts, the Federal Reserve played a lead role in a set of recommendations for the reform of reference interest rates produced by the Financial Stability Board (FSB). Former Governor Jeremy Stein, followed by Governor Jay Powell, co-chaired a working group with Martin Wheatley of the U.K. Financial Conduct Authority (FCA). This working group was charged with reviewing existing interest rate benchmarks, and for establishing and guiding a group of market participants to identify the feasibility and viability of adopting alternative reference rates.

Prior to the recent reforms, all submissions were immediately made public. The aim of the LIBOR-setting process has been to create a set of reference rates that would be credible and would generate robust measures of bank funding costs across a wide range of market conditions. The credibility was based on the borrowing experience from the submitting banks represented through their submitters – those individuals responsible for actually submitting an answer each day to the administrator. The potential conflicts of interest between the submitters and traders within the bank were typically handled through internal policies such as the presence of information barriers that were intended to prevent sensitive information from flowing between the traders and LIBOR submitters. The robustness to market conditions would be maintained even in periods of market stress or a lack of transactions by the reliance on the hypothetical question instead of the use of actual transaction data. That is, even if during stressed times when trading became sporadic in a particular currency-maturity pair, all submitters could still answer the question even if their bank did not happen to engage in any trades on that particular day in that particular pairing. This ensured a large sample size even during stressed market conditions. The trimming of the sample helped to minimize the influence of any outlier submission, but also limited the ability for any one submitting bank to influence the posted rate. 3  See McConnell, “Systemic Operational Risk: The LIBOR Manipulation Scandal.” Journal of Operational Risk, 8(3):59–99.