On 25 March 2013, the FSA published its Policy Statement (PS13/6) finalising the new rules and regulations for financial benchmarks, following on from the recommendations of the Wheatley Review of LIBOR, and building on the provisions in the Financial Services Act 2012 which enable the regulation of activities in relation to benchmarks. The rules come into force on 2 April 2013. Key provisions include:

  • Requirements for benchmark administrators to corroborate submissions and monitor for any suspicious activity
  • Requirements for those submitting data to benchmarks to implement and maintain a clear conflict of interests policy and appropriate systems and controls
  • Creation of two new significant influence functions (“SIFs”) of benchmark administration and benchmark submission

Recognising that there were only two clear working days between the publication of the new rules and their coming into effect, the FSA has included some transitional provisions. However, to benefit from this transitional relief, firms have only 2 weeks from 2 April 2013 to lodge their applications for approval of the individuals nominated to perform the new benchmark controlled functions with the new FCA. The backstop date for determination of those applications is 6 months from 2 April 2013.

Background

The final report of the Wheatley Review, which was published in September 2012, outlined a number of issues and failings in the LIBOR process and made recommendations to both Government and market participants to rectify those failings. The Review noted in particular deficiencies in firms’ systems and control procedures, weaknesses and conflicts of interest in governance frameworks, and a lack of credible oversight by the then administrator of LIBOR (the BBA), and therefore recommended that LIBOR activities should be brought within the scope of statutory regulation.

Acting on this recommendation, the Government incorporated provisions into the Financial Services Act 2012 to allow the regulation of activities in relation to benchmarks, and the Treasury has amended the Regulated Activities Order to make the administering of, and providing information to, specified benchmarks regulated activities under the Financial Services and Markets Act 2000 (FSMA). The legislation comes into force on 1 April 2013. The only benchmark initially specified is LIBOR.

The FSA’s consultation paper (CP12/36) contained proposals for the regulation and supervision of benchmarks such as LIBOR, which included the creation of a new chapter in the Code of Market Conduct section of the FSA Handbook (“MAR”) and the creation of two new SIF controlled functions. The FSA also proposed a new Handbook Guide for benchmark administrators and submitters: BENCH. Following “generally supportive” responses to the consultation on the specific proposals set out in CP12/36, the FSA has now published final “made” Handbook provisions.

Benchmark submission

MAR 8.2 sets out the provisions for benchmark submitters, slightly revised following the consultation, which require firms to:

  • Establish and maintain adequate and effective organisational and governance arrangements for the process of making benchmark submissions.
  • Appoint a benchmark manager (CF40) with responsibility for the oversight of compliance with MAR (with sufficient authority and access to resources/information to enable him to carry out that responsibility.
  • Ensure benchmark submissions are determined using an effective methodology and based on objective criteria and relevant information:
    • As well as quantitative criteria, an effective methodology may also include qualitative criteria (e.g. expert judgement of the benchmark submitter);
    • Review of methodology (at least every quarter) as/when market circumstances require to ensure benchmark submissions are credible and robust.
  • Maintain and operate effective organisational and administrative arrangements to enable the identification and management of any conflicts of interest that may arise from the process of making benchmark submissions:
    • Establish, implement and maintain an appropriate conflicts of interest policy, effective controls to manage internal conflicts, and effective measures to prevent or limit any person from exercising inappropriate influence over benchmark submissions;
    • Notify the FCA without delay of suspected manipulation (or attempt) of a specified benchmark, or of collusion.
  • Keep for 5 years:
    • records of benchmark submissions;
    • all information used to enable benchmark submissions to be made;
    • reports on the key sensitivities the benchmark submitter may have regarding the specified benchmark it is submitting to, for at least five years.
  • Provide the relevant benchmark administrator with all information used by the benchmark submitter to enable benchmark submissions to be made on a daily basis:
    • a description of the methodology used and, if applicable, an explanation of how any quantitative and qualitative criteria were used;
    • on a quarterly basis, aggregate information to allow the benchmark administrator to produce statistics relevant to the specified benchmark.
  • Appoint an independent auditor to report to the FCA on compliance with the requirements of MAR 8 on a regular basis:
    • generally report to be issued annually (a longer period may be agreed).

Estimated ongoing costs for LIBOR-submitting firms are up to £545,000 per year and one-off costs up to £2.5 million.

Benchmark Administration

MAR 8.3 sets out the provisions for benchmark administrators, slightly revised following the consultation, which require firms to:

  • Establish and maintain effective organisational and governance arrangements to enable the administration of a specified benchmark.
  • Have regard to the importance of maintaining integrity of the market and the continuity of the specified benchmark, including contractual certainty for contracts referencing the benchmark.
  • Maintain and operate effective organisational and administrative arrangements to enable the identification and management of any conflicts of interest arising from the process of administering a specified benchmark;
    • including measures designed to ensure the confidentiality of benchmark submissions and other information received from benchmark submitters (where not made public by mutual agreement) – e.g. confidentiality agreements for employees, members of the oversight committee.
  • Appoint a benchmark administration manager (CF50) with responsibility for the oversight of compliance with MAR (with sufficient authority and access to resources/information to enable him to carry out that responsibility.
  • Have effective arrangements and procedures for regular monitoring and surveillance of benchmark submissions, including:
    • carrying out statistical analysis;
    • an effective whistle-blowing procedure, allowing anonymous report to benchmark administrator of conduct that may involve (attempted) manipulation of the relevant benchmark;
    • monitoring of benchmark submissions to:
      • identify breaches of the benchmark administrator’s practice standards;
      • identify potential (attempted) manipulation of the specified benchmark;
      • provide the oversight committee of the specified benchmark timely updates of suspected breaches or (attempted) manipulation;
      • enable provision of all relevant information to the FCA where appropriate.
  • Establish an Oversight Committee
    • to include representatives of benchmark submitters, market infrastructure providers, users of the specified benchmark and at least two independent non-executive directors (“NEDs”) of the benchmark administrator approved to carry out the NED function;
    • with responsibility for considering the definition and scope of the specified benchmark, exercising collective scrutiny of benchmark submissions if/when required, and notifying the FCA of benchmark submitters that repeatedly fail to follow the required practice standards.
  • Through the oversight committee:
    • develop practice standards in a published code which sets out the responsibilities for the submitters, the administrator and its oversight committee, in relation to the relevant specified benchmark;
    • undertake periodic reviews of practice standards, the setting and definition of the relevant specified benchmark, the composition of benchmark submitter panels and the process of making benchmark submission; and
    • notify the FCA of, then publish and invite representations on, any changes proposed as a result of such review, and have regard to such representations.
  • Provide all benchmark submissions relating to the relevant specified benchmark to the FCA on a daily basis
  • Publish quarterly aggregate statistics outlining the activity in the underlying market relevant to the specified benchmark
  • Be able to meet its liabilities as they fall due, and maintain at all times sufficient financial resources to be able to cover the operating costs of administering the specified benchmark for a period of at least six months (notwithstanding any other financial resource requirements that may apply)
    • MAR 8.3.13R sets out the minimum amount of financial resources required;
    • Note that FCA’s normal expectation is that benchmark administrators should hold sufficient financial resources to cover the operating costs of administering the specified benchmark for a period of nine months;
    • Further guidance in relation to the type of assets that can and cannot be included in the financial resources requirement is set out in MAR 8.3.15G.
  • Pay fees to the FCA, as follows:
    • an application fee of £25,000;
    • an annual fee of £175,000 to cover the cost of supervision (this has been reduced from an estimated annual fee of £385,000 following responses to CP12/36).

The ongoing running costs for the LIBOR administrator are estimated as being to £1 million per year, including: the cost of systems and controls, costs arising from the oversight committee, and the FCA’s financial resources requirements. The administrator may have one-off setup costs of £1.6 million.

Other relevant rules and guidance

BENCH: The requirements outlined in MAR 8 are additional to the FCA’s general requirements for authorised firms, so other areas of the FSA Handbook will apply to benchmark administrators and submitters. In order to help firms navigate the full suite of requirements applicable to such firms the FSA has created an additional Handbook Guide (“BENCH”), which outlines all areas of the Handbook that will apply to these firms when conducting the regulated activities of benchmark submission and benchmark administration.

PERG: The Perimeter Guidance Manual (“PERG”) has been updated to provide additional guidance relating to the new regulated activities of providing information in relation to a specified benchmark and administering a specified benchmark.

  • PERG 2.7.20IG makes it clear that a benchmark submitter that collects, analyses or processes information or expressions of opinion for the purposes of making its own submissions will not be regarded as carrying on the activity of administering a specified benchmark (which includes collecting, analysing or processing information or expressions of opinion provided for the purpose of determining a specified benchmark).

No right of action for damages: A contravention of a rule in MAR 8 will not give rise to a right of action by a private person under section 138D(2) of the Act.

Next steps

  • The new rules will come into force on 2 April 2013, immediately after the cutover to the UK’s new regulatory architecture.
  • Firms have a grace period of 2 weeks from 2 April 2013 within which to submit applications for approval in respect of individuals to perform the new CF 40 and CF 50 functions, during which period no controlled function will apply:
    • while those applications are being processed, the firm and nominated individuals will have the benefit of an extended grace period in respect of the performance of those functions (but subject to a 6 month cut-off).
  • Benchmark administrators and submitters will be regulated and supervised by the FCA in respect of those activities.
  • The FCA will conduct a thematic review of LIBOR-submitting firms’ compliance with the new regulations within the first year.