Lynn Patterson: Rebooting reference rates

Remarks by Ms Lynn Patterson, Deputy Governor of the Bank of Canada, to the Investment Industry Association of Canada and Institute of International Finance, Toronto, Ontario, 18 June 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
17 July 2018


Thank you and good afternoon.

My topic today is interest-rate benchmarks or reference rates and the work under way here in Canada and globally to strengthen them.

Before I plunge in, let me take you back to the 1980s. Aside from the monstrous shoulder pads in my suit jackets, the decade gave us several important innovations. One of the most widely used was Windows. Not the kind you put in your house, but the operating system for your computer. Microsoft released Windows 1.0 in 1985. Most of us are now using Windows 10. Each new version improved functionality and reliability.

The most widely used benchmark-the London Interbank Offered Rate (LIBOR)-was first published in 1986, a year after Microsoft released Windows. It has undergone only one material change in the past 30 years and was certainly never originally designed to support what has become a US$350 trillion market. Now, it is difficult to imagine modern financial markets without derivatives enabled by benchmarks1. However, just as Windows 1.0 isn't versatile enough to support new computer programs that have been introduced over the past 30 years, many benchmarks are no longer suitable for the wide array of derivatives markets they support. In addition, the scandals and mistrust related to the manipulation of benchmark rates for the financial benefit of individuals and institutions have made their future use unpalatable.

Not surprisingly, then, these problems with benchmarks have undermined confidence in their reliability and robustness. In response, global authorities are working closely with the private sector to address them.

For many of you in this room, benchmark reform is probably a familiar topic, and you understand the significant role these rates play in the functioning of markets.

But benchmarks, like Windows, are part of our day-to-day lives in one way or another. How they function and how they may change matters a great deal not just to your industry but also to most Canadians. Our financial wealth is connected to benchmarks. For example, exchange-traded funds and mutual funds may invest in products linked to benchmarks. And mortgage costs are based on bank funding costs, which, in turn, include inputs priced off derivatives contracts using benchmarks.

So, reforming this foundational element of our financial infrastructure is critical to both the financial industry and the broader economy. Indeed, we're long overdue for an upgrade.

In my remarks today, I'm going to discuss the work afoot to either validate, enhance or transform various widely used benchmarks or create new ones. I'll start with an overview of the work under way globally and then focus on what is being done in the United States and Canada.