On December 22, 2014, the UK Financial Conduct Authority (FCA) issued a consultation paper with respect to extending the FCA’s regulation of the London Interbank Offered Rate (LIBOR) benchmark to seven additional major UK-based financial benchmarks in the fixed income, commodity and currency markets.
Benchmarks historically have not been regulated in the United Kingdom. However, following the much-publicized recent conduct concerning the fixing of LIBOR, in April 2013 the FCA was granted powers to regulate LIBOR together with other benchmarks as specified from time to time by the UK government. Based on the initial recommendations as part of the Fair and Effective Markets Review––a review established to reinforce confidence in the fairness and effectiveness of the wholesale financial market activity in the United Kingdom and conducted by a body led by the Bank of England, HM Treasury and the FCA––in addition to LIBOR, the following seven UK-based financial benchmarks now are also to be brought into the regulatory scope of the FCA (the Additional Benchmarks):
- Sterling Overnight Index Average (SONIA);
- Repurchase Overnight Index Average (RONIA);
- International Swaps and Derivatives Association (ISDAfix);
- WM/Reuters London 4pm Closing Spot Rate;
- London Gold Fixing (soon to be replaced by the London Bullion Market [LBMA] Gold Price);
- LBMA Silver Price; and
- ICE Brent Index.
The purpose of the consultation paper is to seek views on how the current generic approach to regulating benchmarks could be applied beyond LIBOR to those firms that administer and, where appropriate, contribute data or information (submitters) with respect to the aforementioned benchmarks. This is consistent with the FCA’s overall objectives to ensure that markets work well and to enhance market integrity generally.
In the consultation paper, the FCA recognizes that there are differences as to how benchmarks are administered. Nonetheless, the consultation paper makes it clear that regardless of administration techniques used, benchmark administrators and submitters will be required to be authorized and regulated by the FCA and therefore adhere to all rules and guidance set out in the FCA Handbook applicable to them in conducting their activities. Moreover, benchmark administrators will be required to:
- implement credible governance and oversight measures, including an oversight committee and establish practice standards to ensure robust arrangements are in place to administer the relevant benchmark(s);
- monitor, scrutinize and keep records of benchmark submissions to identify breaches of practice standards and/or potentially manipulative behavior and ensure there is a proper audit trail of submissions;
- maintain sufficient financial resources to ensure that the administrator can cover operating costs for six months, plus a buffer period of three months to ensure the viability and continuity of the relevant benchmark(s); and
- appoint a senior individual, approved by the FCA, to oversee and ensure the firm’s compliance with the requirements of the FCA for benchmark administration.
Interested parties are invited to provide responses to the consultation paper by January 30.The FCA expects to publish its final rules in the first quarter of 2015 that will apply to the Additional Benchmarks from April 1.
The full text of the consultation paper is available here.