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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.

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