Recently, the Global Financial Markets Association (GFMA) published a statement of Principles for Financial Benchmarks, which are intended to represent best practices for financial benchmarks. The principles have as their objective promoting uniform, transparent and sound practices in relation to indices.
The GFMA defines a financial benchmark “as a commercial or published price assessment, distributed regularly to third parties and primarily intended for use as a reference in determining the pricing of, or the amount payable pursuant to, a financial instrument or contract.” The Principles acknowledge that financial benchmarks vary and may be used for various purposes and the Principles are not intended to apply to: indices that are primarily used for purposes other than pricing financial contracts; customized indices used for pricing bespoke bilateral or similar transactions among a limited number of counterparties; and indices issued by public sector entities. Based on these definitions, certain indices that are used as reference assets for structured products or that are used in connection with ETFs may be included within the scope of the Principles, although it is not clear whether these types of products were contemplated in connection with the Principles.
The European Commission has published a Consultation Document on the Regulation of Indices seeking comment by November 15, 2012 on an appropriate framework. The Commission defines benchmarks as “(a) indices or published figures calculated through the application of a formula to underlying data that are (b) used as a benchmark or reference price for financial instruments.” The Consultation notes that an index may involve some measure of discretion and there may be a need for a framework to ensure the appropriate exercise of discretion and to mitigate potential conflicts of interest. Market participants are urged to consider the main indices that they use, the construction of these indices, whether these indices use actual data, the extent to which discretion is employed, and whether actual transaction data is used and is readily available. The consultation sets forth a framework to address many of these issues.
The Consultation also discusses the role of a calculation agent, and outlines elements of a framework that may help address the discretion that may be exercised by a calculation agent.
The Principles, Consultation and other ongoing dialogues relating to benchmark indices are likely to raise other issues for market participants to consider and address through changes to, among other things, their compliance policies and procedures and their index arrangements.