Financial Benchmark Regulation - Comment Letters

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Financial Benchmarks, IOSCO
First Report Released Consultation Released Comment Deadline
January 11, 2013 April 16, 2013 May 16, 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. A summary of letters submitted to IOSCO can be found below.

Global Financial Markets Association - February 11, 2013

IOSCO Consultation Document on Financial Benchmarks
February 11, 2013

From the comment letter:

"The overall responsibility for the benchmark process lies with the sponsor. The Principles are grounded in three fundamental sponsor obligations, which should be applied in a manner commensurate with the significance of the benchmark:

  • Governance: A sponsor should ensure that there is an appropriate governance structure for oversight of the benchmark;
  • Benchmark Methodology and Quality: A sponsor should employ sound design standards in devising the benchmark and ongoing processes related to its operations; and
  • Controls: A sponsor should ensure that there is an appropriate system of controls promoting the efficient and sound operation of the benchmark process and should implement such a system of controls."

Note: GFMA is made up of three financial trade associations, Association for Financial Markets in Europe (AFME) in Europe, the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong and the Securities Industry and Financial Markets Association (SIFMA) in the U.S.

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ISDA - February 11, 2013

IOSCO Consultation Document on Financial Benchmarks
February 11, 2013

Highlights from the comment letter:

  • In relation to any transition to alternative benchmarks, there should be clear and long term arrangements in place. Failure to achieve a smooth and progressive transition will result in major market dislocation and significant “jump risk” if there is an abrupt move from old benchmarks to a successor. The rate of any transition will likely be chiefly determined by the speed of migration to an alternative in terms of liquidity, as well the extent to which market participants have amended their documentation (Q. 39).
  • Regarding a hybrid methodology for calculation purposes, we generally support the use of actual trade data (where available) in benchmarks’ compilation. At the same time, we believe that it will still be necessary to deploy algorithms or expert judgment to fill the gaps where no trade data exists. In fact, we would argue that expert judgment still plays a part even where actual trade data exists, given that the decision to transact the trade(s) in practice depends upon the exercise of such expert judgment (Q. 33).
  • ISDA developed ISDAFIX to facilitate the determination of exercise values for cash-settled swap options. The existence of such a benchmark provides a transparent, readily available value to which parties to a transaction can refer as a settlement rate. Without such a benchmark, it might be necessary to go through the process of calling a number of active dealers for quotes in order to settle transactions.
  • ISDA encourages IOSCO to take account of the distinction between key public benchmarks that are primarily used for purposes of pricing a broad range of financial instruments or contracts and benchmarks in the broader sense (including proprietary indices). In short, not all indices should be regarded as “public goods” and this should be reflected in the design of regulation (Q. 1).
  • In relation to future reforms, there should be alignment with existing regulatory initiatives. Particularly, if transactions are to be reported, then existing reporting databases, systems and reporting routes should be leveraged (Q. 39).
  • Regarding commodity derivatives, many benchmarks are important for the functioning of the markets. Exchange-traded benchmarks including CME/ NYMEX, ICE and CRB as well as benchmarks of price reporting agencies are used to price physical markets and, indirectly, derivatives and hedging instruments.

Regarding more specifically PRAs, ISDA supports IOSCO’s work on self-governance and considers that PRAs, taking into account the role they play for physical, cash and derivatives contracts and given that they are used by any market participants, should be subject to:

    • Transparent methodologies that are subject to independent oversight consistent with existing IOSCO principles;
    • Transparent governance, including robust dispute resolution and complaints processes.
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CFA Institute - February 11, 2013

IOSCO Consultation Document on Financial Benchmarks
February 11, 2013

From the comment letter:

  • "Greater transparency underscores market discipline and helps mitigate conflicts of interest. Actual transaction data should be used in the compilation of benchmarks (where relevant) to the fullest extent possible."
  • "Other important measures to ensure the integrity of benchmarks include robust internal controls, policies, and procedures surrounding the assimilation and contribution of data for the calculation of benchmarks; adequate management reporting and supervision over the provision of inputs; policies to manage and mitigate conflicts of interest; and appropriate regulatory oversight."
  • "We believe that benchmark administrators and submitters should adhere to a code of conduct to ensure accountability. Codes of conduct should be supplemented by additional regulatory oversight of

submitters or administrators or both, where relevant and as appropriate, along with strong enforcement powers."

  • "We believe that regulators should limit themselves to the regulation of index production (where appropriate as outlined above) and not step into invasive regulation of index choice or limit index use."
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Markit - February 11, 2013

IOSCO Consultation Document on Financial Benchmarks
February 11, 2013

In the comment letter, Markit offers three general comments, followed by answers to the questions posed by IOSCO.

  • Applicability of certain issues
    • With the CR having a wide scope and discussing both benchmarks and indices, IOSCO should note that many of the issues it raised will not necessarily be applicable to all products that are in scope of the report. For example, whilst governance and methodology issues are relevant to the determination of the composition of traded indices, due to the nature of these products, the index price might not be calculated by the index sponsor but set bilaterally between counterparties to each transaction. The discussion about challenges in relation to contributions, methodology, and contributors will therefore not be relevant for these products.
  • Benchmark administration by public bodies
    • IOSCO states that it “did not consider BM Administration by public bodies to be in scope.” However, it went on to say that “BMs where a public body acts as mechanical Calculation Agent, as defined in Annex A, are within scope.” We believe it would be useful for IOSCO to clarify the grounds on which it believes that BM Administration by public bodies should not be in scope for regulatory scrutiny or oversight. It is our view that publicly administered BMs, the importance of which can be significant, are exposed to the same issues as other BMs while the incentives to address them will often be low. In this context, we also encourage IOSCO to clarify what is meant by the term “mechanical Calculation Agent”.
  • Survey-based inputs vs. contributions
    • We note that IOSCO uses the term “survey or estimate based” to describe the mechanism that is often applied to collect submissions to a BM. However, we believe that such description is not applicable to the

majority of the relevant indices and benchmarks and we therefore recommend distinguishing between “survey-based” mechanisms, where submitters provide an opinion, estimate or view, and “contribution based” mechanisms, where submitters provide a specific number or price that they derived from various inputs. IOSCO should note that we will use the term “contribution-based” throughout our response, as we believe it more accurately describes the nature of the information that we collect for our indices.

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International Capital Market Association - February 11, 2013

IOSCO Consultation Document on Financial Benchmarks
February 11, 2013

In the comment letter, ICMA considers that:

  1. the authorities' focus in reforming indices should be on regulating the governance of the process for setting indices to ensure that it cannot be manipulated and to prevent market abuse;
  2. it is important that any reform of rate-setting processes for existing transactions referenced to indices does not disrupt the international capital market;
  3. it is for the market to choose, as a commercial matter, which reference rates to use for new transactions;
  4. if powers to compel participants in financial markets to make submissions to benchmarks exist, they should only be used as a last resort, and where there is a significant risk of widespread disruption to the international capital market;
  5. any market abuse should be covered by appropriate market abuse regulation; and
  6. regulators should distinguish between public “benchmarks” and other “indices” when designing regulation.

In the letter, ICMA focuses on (2) and (3), particularly commenting on the question of how changes to, or transition from, existing indices could affect certain types of financial contract.

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