Joseph Grundfest

Internationalization of the world'securities markets: Economic causes and regulatory consequences

Not long ago, Americans traded in New York, British traded in London, and Japanese traded in Tokyo. It was a simple world in which the flow of securities transactions respected political geography.

Alternatives to Libor

Evidence of extensive fraud in LIBOR submissions has fueled international calls for reform. A common theme is that the current rate setting process, in addition to being subject to manipulation, relies on conjecture as to rates that might prevail in markets that can often be illiquid, and should be replaced with a process that relies more directly on actual transactions. There are no perfect substitutes for LIBOR. Overnight index swap rates and repo rates, the most attractive alternatives to LIBOR, do not incorporate the same counterparty credit risk or term premiums. Repo rates also reflect the risks of underlying collateral, which can be inappropriate for certain market participants. Liquidity in these alternatives is also concentrated in shorter maturities. These differences make it difficult for LIBOR alternatives to fully replace LIBOR in all instances.The challenge of finding a LIBOR substitute can be reframed along three dimensions. With regard to existing contracts, the challenge may be to reform the current version of LIBOR so it better reflects legitimate market expectations while being less susceptible to self-serving panel bank manipulation. With respect to new contracts, parties can look to a wide variety of LIBOR alternatives to select a substitute. Put another way, it makes little sense, on a prospective basis, to require a single substitute for LIBOR when the market may rationally prefer any of several viable alternatives. And, once new metrics have been established in the market for new contracts, renegotiating existing contracts to substitute a new metric for the current LIBOR, or improved version of LIBOR, may be easier.Identifying a single, best substitute for LIBOR may thus be a fool’s errand. Creating an environment in which many different alternatives can legitimately co-exist may be a preferred strategy.

Measurement Issues in the Proxy Access Debate

Recent empirical data indicate that the Commission’s proxy access proposals reduce shareholder wealth and are inimical to the best interests of the shareholder community at large. Cross-sectional variation in stock price response data further suggest that the Commission should reject a ‘one-size-fits-all’ approach, and that an opt-in rule is less likely to destroy shareholder wealth than an opt-out rule. None of the studies cited by the Commission in its request for further comment support a competing conclusion. The studies cited by the Commission instead suggest a rational basis for the market’s concern that the proxy access process can be captured by a small number of institutions with idiosyncratic objectives that conflict with the best interests of the larger shareholder community.

Book of the Month

Baer, Walter S., Henry Geller, Joseph A. Grundfest, and Karen B. Possner. Concentration of Mass Media Ownership: Assessing the State of Current Knowledge (Santa Monica, Calif.: Rand Corp Report R-1584-NSF, September 1974) 202 pp. about

Subordination of American capital

5.00 (paper) Baer, Walter S., Henry Geller, and Joseph A. Grundfest. Newspsper-Television Station Cross-Ownership: Options for Federal Action (Santa Monica, Calif.: Rand Corp Report. R-1585-MF, September 1974) 55 pp. about

Just Vote No: A Minimalist Strategy for Dealing with Barbarians inside the Gates

3.00 (paper)