The International Organization of Securities Commissions (IOSCO) Task Force on Financial Market Benchmarks (the Task Force), which the Financial Conduct Authority (FCA) chief executive Martin Wheatley co-chairs, has published its proposed Principles for Financial Benchmarks (the Principles) for consultation.
By setting out clear standards for benchmark administrators and other relevant bodies on benchmark quality, methodology, governance, and accountability mechanisms, the Principles are intended to strengthen the reliability and integrity of benchmarks used in financial markets. This goes beyond work on interest rate benchmarks, to include other forms of references rates, indices and prices.
The FCA’s work on reforming LIBOR has helped inform the development of this wide set of Principles. Building on this, the FCA is undertaking further work to examine any potential weaknesses in the wider range of benchmarks captured under the IOSCO Principles and will be writing to firms about this shortly.
Areas covered by the Principles include:
- Roles and responsibilities of benchmark administrators (and where applicable, third parties and contributors to benchmarks)
- Managing conflicts of interest
- Developing a control framework
- Benchmark design and inputs
- Benchmark methodology and periodic review
- Transition
- Complaints procedures
- Audit requirements and record keeping; and
- Co-operation with relevant regulatory authorities
Historically benchmarks have not been subject to direct regulatory oversight. The Task Force was created to consider a broader range of issues relating to benchmarks used in different financial markets, following the investigations and enforcement actions for the manipulation of major interest rate benchmarks LIBOR and EURIBOR by the FSA, Commodity Futures Trading Commission and Japanese Financial Services Agency. The Task Force has worked closely with other international initiatives undertaking work on related issues, including work carried out by central banks and European financial regulators.
The Principles reflect the FCA’s new rules and regulations for LIBOR and other financial benchmarks published on 25 March 2013, and develop the findings of the Wheatley Review which noted the need for close cooperation between UK authorities and the international community on other global benchmarks.
Martin Wheatley, chief executive of the FCA and co-chairman of the IOSCO Task Force on Financial Market Benchmarks, said:
"Benchmarks play a vital role in the confidence and integrity of financial markets. The Principles proposed today are a key step in enhancing the oversight and quality of benchmarks. The FCA’s leading role in developing the Principles reflects the priorities set out in our new wholesale conduct strategy by ensuring that participants in financial markets have the means of assessing the quality of their contribution and the quality of the benchmark they use."
"Through IOSCO, the FCA will continue to work closely with the European and international community to establish clear standards for effective global benchmarks. Once agreed, the Principles will be reflected in future reviews or additional supervisory activity of benchmarks undertaken by the FCA."
Background
- The IOSCO consultation.
- The Wheatley Review can be found on HM Treasury’s website.
- The new FCA rules and regulations for financial benchmarks.
- The principles should be understood as a set of recommended practices that should be implemented by Benchmark Administrators and Submitters. The application of these principles should be proportional to the size, and risks posed by each Benchmark Administrator and benchmark setting process. IOSCO members should consider whether regulatory action is appropriate to encourage implementation of the Principles.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers
