The Visible Hand: Benchmarks, Regulation and Liquidity

Matteo Aquilina, Gbenga Ibikunle, Vito Mollica, Andrea Pirrone, Tom Steffen

Research output: Working paper


We present a model showing that a more precise benchmark assessment can improve welfare by overcoming traders’ and the regulator’s inability to penalize the dealers sufficiently. The empirical analysis of the change from the panel-based benchmark assessment under the ISDAFIX regime to the market-based assessment under the ICE Swap Rate regime and the contemporaneous start of regulatory supervision by the UK Financial Conduct Authority (FCA) confirms the theoretical predictions. Studying proprietary order book data of electronically-traded USD interest rate swaps, we find that liquidity in the underlying market improves following the benchmark regime change. Our results are robust to a multitude of controls and show that the enhancement in liquidity for swaps with a regulated benchmark assessment is over and above the improvement in those swaps without assessment. Regulations that increase the assessment precision can therefore have positive effects on the overall market. Conservative estimates of direct savings in a single swap tenor on one trading platform are in the region of $4m-$7m.
Original languageEnglish
Number of pages51
Publication statusPublished - 1 Feb 2018


  • benchmarks
  • regulation
  • interest rates
  • ICE swap rate


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