Benchmark Regulation

Benchmarks are metrics that are deeply embedded in the financial markets. They are essential to the efficient functioning of the markets and are used in a wide variety of ways-from pricing oil to setting interest rates for consumer lending to valuing complex financial instruments. In recent years, benchmarks have also been at the epicenter of numerous, multi-year market manipulation scandals. Oil traders, for example, deliberately execute trades to drive benchmarks lower artificially, allowing the traders to capitalize on the manipulated benchmarks. This ensures that later trades relying on the benchmarks will be more profitable than they otherwise would have been. Such manipulative practices have far-reaching and, in some instances, destabilizing effects on the financial markets. In responding to these benchmark manipulation scandals, regulators have relied on the existing anti-manipulation framework, which is based solely on ex post prosecution of wrongdoers. The current framework treats benchmark manipulation as just another form of market manipulation. But, as more benchmark manipulation schemes come to light, they cast doubt on the effectiveness of this traditional approach to curbing a modern-day form of manipulation. This Article provides the first in-depth analysis of the differences between benchmark manipulation and traditional forms of market manipulation. This analysis demonstrates that regulators cannot adequately address benchmark manipulation through ex post enforcement actions alone. In failing to recognize how benchmark manipulation differs from traditional manipulation, regulators miss a prime opportunity to oversee a key facet of the financial markets and safeguard market integrity. By focusing on the unique attributes of benchmarks that make them susceptible to manipulation, this Article puts forward a comprehensive prescriptive regulatory framework aimed at detecting and minimizing benchmark manipulation, rather than merely punishing wrongdoers after the fact