s administrator. attention is paid to the additional controls necessary for survey - based benchmarks, which have been a particular cause of concern. replacing benchmarks the second option, replacing existing benchmarks with new ones, is challenging for two reasons. first, it may be difficult to find a superior alternative benchmark, which is robust and also captures the relevant economic exposures. second, even if a suitable alternative can be identified, making the transition may not be a straightforward matter. the iosco principles outline desirable features for robust financial benchmarks. notably, they call for benchmarks to be anchored to observable transactions in active underlying markets. one could consider going further : relying only on actual market prices as benchmarks. indeed, there are some cases – for instance, short - term repo markets – in which underlying markets are sufficiently liquid to reliably support benchmarks that are simply averages of the rates at which participants transact. in other cases, market prices could at least be used as a cross - check against a survey - based measure, even when they cannot be used directly to calculate the benchmark. in other cases, it may be hard to find a suitable market price that tracks the desired aspects of market conditions. if a replacement benchmark does not fully reflect the economic exposures that are being hedged, the hedgers will not be able to manage their risks as effectively. moreover, in the absence of appropriate governance, controls and regulation, market prices can also be subject to manipulation. benchmarks derived solely from transactions also face the challenge of how to determine the benchmark rate should there be no transactions in the relevant market on a particular day, or indeed over a whole series of days – for example during periods of stress. even if a superior alternative benchmark could be found for some markets, several issues would need to be addressed before making a switch. existing benchmarks are already written into an enormous number of contracts, some of which could still have years, if not decades, to run. these contracts would have to be closed out and / or rewritten, which raises issues of coordination and of legal risk. taking these concerns into account, last year the financial stability board ( fsb ) established a steering group of regulators and central banks to help coordinate upcoming reviews of existing benchmarks against iosco ’ s standards and to examine the feasibility of developing alternative benchmarks, at least for some markets. the main focus is on the major global interest rate benchmarks : libor

timothy lane : financial benchmarks – a question of trust remarks by mr timothy lane, deputy governor of the bank of canada, to the osgoode hall law school and schulich school of business, toronto, ontario, 24 march 2014. * * * thank you for the opportunity to speak to you today on a subject that has been at the centre of much attention recently. this city, like all others, depends on trade and commerce to thrive. at the root of successful trading and commercial relationships is the trust that each party to a transaction will deliver what was agreed. many institutions have been developed throughout history to support that trust. among the most basic of these are standardized units of measurement. more broadly, that trust is founded on the rule of law and other elements of good governance. trust is also of fundamental importance to the world of finance. that trust has been shaken recently by a series of headlines related to financial benchmarks such as the london interbank offered rate, or libor. today, i will discuss why we use financial benchmarks, how we use them, why they have been in the headlines and what we are doing to re - establish the trust that is so vital to a wellfunctioning financial system. what are financial benchmarks? financial benchmarks are used in a variety of contracts to specify what, or how much money, is to be delivered on particular dates. one example is floating - rate debt, where the borrower pays the lender an amount of interest based on a benchmark that varies from one period to another according to a selected measure of interest rates. benchmarks are also particularly important for derivatives such as interest rate swaps, which are critical tools of risk management. when benchmarks function as they should, they are a straightforward and technical element in the world of finance. they are intended to provide an unbiased, arm ’ s - length measure of underlying market prices. what went wrong? but some financial benchmarks have recently made headlines – for the wrong reasons. these benchmarks include libor and some foreign exchange rate benchmarks ( commonly known as “ fx fixes ” ). as alleged misconduct related to such benchmarks has been investigated, firms have paid multi - billion - dollar fines, and some high - flying traders have lost their jobs. these headlines have been damaging to trust. they raise doubt about whether some key financial benchmarks were in fact providing an unbiased, arm ’ s - length measure of actual market conditions.