This is an important issue. It goes to several aspects of the financial system. First and foremost, and I'll speak generally about internationally, it goes to market integrity. We have seen what can only be described as some shocking criminal behaviour—we'll leave it to the courts to make those final determinations, and it's certainly behaviour that should be prosecuted to the full weight of not just securities regulators but also judicial authorities, as appropriate—in the manipulation of one of the most important financial benchmarks, or series of financial benchmarks, that are important to the functioning of the global financial system. That's the question of market integrity, and the oversight of that conduct is the responsibility of market regulators.
What has happened with financial benchmarks, and it's different in different jurisdictions, is that this, in many respects, has not been a regulated activity or an activity that has been overseen directly. What is changing is that the International Organization of Securities Commissions just came out with a series of recommendations last week for changing the governance and oversight of best practices for governance and oversight of these benchmarks. That's the first point.
The second point is that there are some questions—and the chairman of the CFTC raised questions yesterday even on this issue—about the ability of the so-called judgment-based benchmarks to continue to provide reliable indications of the underlying level of costs in transactions between banks.
The FSB, at the request of the G-20, will look into this issue in three respects: first, to ensure that those governance and oversight principles are put in place and they're followed by the member jurisdictions, which would include Canada, for CDOR; secondly, to consider what potential transaction-based benchmarks—so benchmarks that are based in real transactions as opposed to episodic transactions, and judgment around that—could eventually replace some of these, and I don't want to presume the outcome of that analysis; and thirdly, the transition mechanisms and potential transition costs associated with that.
I'll just make two final points.
LIBOR itself is a reference benchmark. It's an important benchmark. It's the costs of banks lending to each other. If you borrow as a corporation, often the cost of your funds is priced off LIBOR. Sometimes, in some countries, mortgages are priced off LIBOR. But LIBOR itself, on top of all that, is the reference benchmark in over $300 trillion derivatives, so it's important that we get it right, and it's important that this is a seamless transition. That's the intent.
The last thing I'll say is that the official sector clearly has a role. We have a role to oversee and ensure integrity in these systems, but we also have a role to coordinate the private sector, and to allow the private sector to identify the next benchmarks and ensure an effective transition.
