Financial Benchmark Regulation

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Financial Benchmarks, IOSCO
First Report Released Consultation Released Comment Deadline
January 11, 2013 April 16, 2013 May 16, 2013

Discussions surrounding possible changes in the regulation of financial benchmarks such as the London Interbank Offered Rate (LIBOR) began in 2012, in the wake of an ongoing scandal involving widespread manipulation of rate submissions by participant banks. While the initial round of fines assessed by regulators such as the CFTC and U.K. Financial Services Authority against Barclays, UBS and the Royal bank of Scotland concentrated on manipulation of LIBOR, the scandal has since widened to include other financial benchmarks such as Euribor, Yen Libor and Swiss Libor.

In January 2013, the International Organization of Securities Commissions (IOSCO) published a consultation report and request for comment on financial benchmarks. The report, which included 41 questions upon which market participants are invited to comment, is IOSCO's first step in the setting of policy guidance and principles for benchmarks. On April 16, 2013, IOSCO released its draft Principles for Financial Benchmarks. Comment letters can be foundHERE.[1]

IOSCO Consultation Report on Financial Benchmarks, January 2013

Subsequent to the LIBOR manipulation scandal that began in 2012, IOSCO created a board level task force on financial market benchmarks. On January 11, 2013, the organization published a consultation report and request for comment on the policy issues related to the work of the task force.

The report explores the concerns regarding the potential for inaccurate submission and/or manipulation of financial benchmarks such as LIBOR, EURIBOR, TIBOR and similar benchmarks. Topics discussed in the report include:

  • The appropriate level of regulatory oversight of the process of benchmarking;
  • Standards that should apply to methodologies for benchmark calculation;
  • Credible governance structures to address conflict of interests in the benchmark setting process within the reporting financial institutions as well as in the oversight bodies; and
  • The appropriate level of transparency and openness in the benchmarking process.
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Principles for Financial Benchmarks - IOSCO, April 2013

In February 2013, CFTC staff and the IOSCO held a roundtable to discuss the January, 2013 IOSCO task force consultation on financial benchmarks. The IOSCO task force used the roundtable discussion to assist it as it designs principles for industry best practices in the use of benchmarks.

On April 16, 2013, the International Organization of Securities Commissions (IOSCO) released a consultation paper, Principles for Financial Benchmarks, which seeks public comments on a set of high-level principles for benchmarks used in global financial markets. The consultation covers 18 principles in four areas, including governance, benchmark quality, quality of the methodology, and accountability.

The closing date for public comments was May 16, 2013.

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European Commission Proposed Rule: Financial Benchmarks, September 2013

On September 18, 2013, the European Commission (EC) proposed rules to restore confidence in indices used as benchmarks for financial products. The rule is a response to reports and investigations surrounding the manipulation of LIBOR, EURIBOR, and other benchmarks such as certain energy indices.

According to the accompanying press release, the objective is to "ensure the integrity of benchmarks by guaranteeing that they are not subject to conflicts of interest, that they reflect the economic reality they are intended to measure and are used appropriately."[2]

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Changes to the ISDAFIX Benchmark, 2014

In January 2014, ISDA announced changes to the methodology of ISDAFIX, the standard benchmark for annual swap rates for swap transactions. Among the changes:

  • Clarifation of the definition of ISDAFIX to emphasize that contributing banks should use executable bid/offer rates;
  • Establishing an ISDAFIX Code of Conduct and an ISDA Oversight Committee, which will address internal governance, systems and controls;
  • Suspension or discontinuation of the rate calculation for currencies and tenors of ISDAFIX with insufficient liquidity in the underlying swap market; and
  • Stronger checks on submission rates for validation.[3]

Thomson Reuters, which previously served as collection agent for non-USD rates, will handle the entire process.[4]

Phase two includes a transition to an automated model that utilizes live prices from trading facilities.

For more information, visit the ISDAFIX page in MarketsWiki.

ISDA CEO Robert Pickel Interview, September 2013

Robert Pickel is the CEO of the International Swaps and Derivatives Association (ISDA). Since joining ISDA in 1997, Pickel has worked to promote and advocate for OTC market participants and work with international regulatory bodies to harmonize regulation across jurisdictions. Pickel spoke with John Lothian News editor-at-large Doug Ashburn about the future of LIBOR and other financial benchmarks, possible alternatives to LIBOR, and how ISDA will work with regulators to smooth out and harmonize benchmarking standards.

References

  1. IOSCO Consults on Financial Benchmarks. IOSCO. Retrieved on February 21, 2013.
  2. New measures to restore confidence in benchmarks following LIBOR and EURIBOR scandals. European Commission. Retrieved on September 23, 2013.
  3. ISDA Announces Key Steps in ISDAFIX Transition. ISDA. Retrieved on January 27, 2014.
  4. UK broker ICAP to lose role in ISDAfix swaps benchmark. Reuters. Retrieved on January 27, 2014.

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