THE FINANCIAL STAILITY BOARD (“FSB”) PUBLISH REPORT ON REFORMING BENCHMARKS
On 22 July 2014, the FSB, the body responsible for coordinating national and international financial authorities, published a report on its approach to reforming major interest rate benchmarks such as LIBOR, EURIBOR and TIBOR.
The benchmarks, which act as the basis for a large volume of financial products and contracts, have suffered a major crisis in confidence after numerous high profile manipulation cases and a shortage of actual interbank lending. The report states this represents a serious systemic risk within the global financial system.
The Official Sector Steering Group (“OSSG”) had been asked by the FSB to focus its work on reforming existing benchmarks and the possibility of finding a safer and more reliable alternative. The FSB, in making its report, followed the recommendations of the OSSG in adopting a report by International Organisation of Securities Commissions (“IOSCO”) on existing benchmarks and a March 2014 report by the Market Participants Group (“MPG”) on transitioning issues to a new rate.
The IOSCO report highlighted that EURIBOR, LIBOR and TIBOR administrators have made good progress in improving the transparency and accountability of their respective benchmarks, but they all failed to provide sufficient information to allow for a comprehensive review. It urged administrators and banks to begin performing a complete overview of the market and indicate any necessary clarification or methodological changes required.
The MPG report recommended strengthening current IBOR rates by linking them more closely to verifiable transactional data (known as IBOR+) in tandem with developing alternative, lower risk, reference rates.
The FSB has mandated the OSSG to continue to monitor progress in achieving the goals of the two reports and has instructed it to deliver an interim report on progress in 12 months.
FSB REPORT TO G20 ON DEFERENCE TO OVER THE COUNTER (“OTC”) MARKET REGULATION
On 18 September 2014, the FSB published a report to G20 finance ministers and central bank governors on the extent to which they were able defer to one another’s OTC derivatives market regulatory regime.
The report noted there has been a general commitment to implement reforms in a consistent way across jurisdictions and that it may be possible to use tools such as deference to other jurisdictions, when justified, in order to rectify some of the differences that do arise.
The report found that there were differences among the countries sampled as to when and how deference would be applied, and that overall deference was more common on specific transaction level rather than entity-level requirements.
FSB TO CONDUCT PEER REVIEW ON SYSTEMATICALLY IMPORTANT FINANCIAL INSTITUTIONS (“SIFIs”)
The aim of the review is to discover key changes in supervisory strategy and approaches, and their subsequent effectiveness in supporting governance of financial markets and institutions.
The report is looking for responses from globally systemically important banks and is hoping to produce a draft report to be published in early 2015.
THE FINANCIAL ACTION TASK FORCE (“FATF”) REPORT ON VIRTUAL CURRENCIES
FATF, the inter-governmental body designed to help promote consistent standards and effective implementation of anti-money laundering and terrorism financing legislation, has published a report on the risks posed by virtual currencies.
The report builds on a previous 2013 report addressing new payments products and services in developing a better understanding and risk matrix for virtual currencies, as well as engaging in discussions over potential money laundering and terrorist financing legislation in the area.
Of particular concern for regulators of virtual currencies is the potential for partial or complete anonymity, with decentralised systems of organisation and a lack of face to face transactional work. The other concern is its global reach, which results in it being accessible by a global pool of people whilst, at the same time, being difficult to tie down to a particular regulatory jurisdiction.
The report notes that whilst there has been some success in clamping down on illegal activities, such as the actio1n taken against Liberty Reserve and Silk Road, these may represent only the tip of the iceberg when it comes to necessary law enforcement in this area.