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80 Md. L. Rev. 1 (2020-2021)

handle is hein.journals/mllr80 and id is 1 raw text is: BENCHMARK COMPETITION SUE S. GUAN* ABSTRACT Over-the-counter (OTC') markets those for currencies, derivatives, swaps, bonds, and commodities, for instance make up an immense and critical component ofglobalfinancial markets. Certain benchmarks, such as the London Interbank Offered Rate (LIBOR), are hardwired throughout these markets and play crucial roles in pricing and valuation. For example, interest payments on instruments ranging from student loans and mortgages to synthetic derivatives are tied to the value ofLIBOR. In 2016, estimates of notional exposure to U.S. dollar LIBOR totaled about $200 trillion ten times U.S. gross domestic product (GDP') that year. Correspondingly, minuscule variations in a benchmark's value will impact vast numbers of assets and transactions for hundreds of millions ofpeople. These benchmarks have become so ubiquitous for an important reason: they have introduced substantial harmonization effects in otherwise decentralized, opaque dealer markets. These benefits fitwithin the prevailing view of financial regulation: because sophisticated market participants, through wealth-maximizing behavior, tend to select towards structures that maximize efficiency, in aggregate social welfare is maximized, meaning that observed equilibria are likely the most efficient equilibria. And thus, OTC markets have remained largely unregulated for decades. This Article argues that this understanding is incomplete and identifies a fundamental misalignment between what is privately optimal and what is socially optimal in OTC markets. By undertaking a structural analysis, this Article documents overreliance by market participants on benchmarks even when they are substantially suboptimal. Thus, in contrast to existing reform proposals, which overwhelmingly assume that a single benchmark will © 2020 Sue S. Guan. * Assistant Professor of Law, Santa Clara University School of Law. I am grateful to Ian Ayres, Tom Brower, Bill Eskridge, Larry Glosten, Vikramaditya Khanna, Yair Listokin, Jonathan Macey, Eric Pan, Menesh Patel, Gabriel Rauterberg, and especially Merritt Fox and William Moon, as well as participants in the National Business Law Scholars Conference at UC Berkeley Law School for helpful comments and conversations. This work was selected for presentation at the 2020 Michigan Law School Junior Scholars Conference, and benefited from faculty workshops at Brooklyn Law School, University of Kentucky College of Law, University of Maine School of Law, Northeastern University School of Law, Ohio State University Moritz College of Law, University of Richmond School of Law, Santa Clara University School of Law, SMU Dedman School of Law, Southwestern Law School, Wayne State University Law School, and Willamette University College of Law. 1

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