Benchmark Regulation and Market Quality

Benchmarks are fundamental elements of financial markets infrastructure. A robust assessment methodology and confidence in their integrity are vital for the efficient functioning of capital markets. In this paper, we assess the role of regulatory benchmark regimes in assuring the former and analyse their implications on underlying market quality. We find that the transition in March 2015 from a panel-based benchmark assessment under the ISDAFIX regime to a market-based assessment under the ICE Swap Rate regime does not lead to a deterioration in the representativeness of the benchmark. Studying proprietary order book data of electronically-traded USD plain vanilla interest rate swaps, we measure a lasting improvement in liquidity following the benchmark regime change. The structural change in the long-term time series of the liquidity measures is endogenously confirmed by statistical models. Increased on-platform dealer competition, likely linked to the new benchmark assessment methodology, explains a large portion of the liquidity enhancement. Our results are robust to a multitude of controls and show that the improvement in liquidity for swaps covered by the regulatory benchmark regime is over and above the improvement in those swaps that are not.