Consultation outcome

Implementation of the Fair and Effective Markets Review’s recommendations on benchmarks to bring into UK regulatory scope

Updated 22 December 2014

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

On 12 June 2014, the government announced the establishment of the ‘Fair and Effective Markets Review’, led by Bank of England Deputy Governor for Markets and Banking, Minouche Shafik, with Martin Wheatley (Chief Executive Officer, FCA) and Charles Roxburgh (Director General, Financial Services, HM Treasury) as co-chairs.

The terms of reference for the review are set out on the Bank of England website.

This consultation document seeks views from the public on the first set of recommendations from the review, concerning which additional major financial benchmarks should be brought into the regulatory framework originally implemented for LIBOR.

The review’s report sets out in detail, in section 1.3, the regulatory framework to which the recommended benchmarks would be subject. The government is aware that there will need to be some adaptions made to the framework to take account of the specificities of the way in which different benchmarks are produced and operate.

The review operates in the context of ongoing international and domestic work on benchmark reform. These discussions range from specific deliberations on a few benchmarks, to broad discussions about the regime for all benchmarks. There is further discussion of this work in section 1 of the review’s report. The work carried out by the review is complementary to those initiatives, and the domestic regime will be updated where necessary to ensure international consistency.

2. The review’s criteria

In order to identify the major benchmarks in the FICC markets, the review team has developed 3 key criteria which benchmarks must meet (section 2 of the report sets these out in detail) in order to be recommended for inclusion in the UK regime.

2.1 Criterion 1 - Benchmarks that are major FICC benchmarks

In its recommendations, the review defines ‘major benchmarks’ as those which have the greatest usage within the main FICC product markets. It is these benchmarks that would have the biggest impact on retail and wholesale investors if they were distorted or abused, and would represent the greatest source of systemic vulnerability and risk if their integrity were questioned.

2.2 Criterion 2 - Benchmarks where the main benchmark administration activities are located in UK

The review’s recommendations only cover UK-based benchmarks due to the appropriateness and limits of legislative reach. This will allow HMT and the FCA to ensure that these benchmarks are brought quickly into regulation.

2.3 Criterion 3 - Benchmarks that are based on transactions in financial instruments which are not covered comprehensively by existing market abuse regulation

The review’s approach is to target those benchmarks which are based directly on instruments that are outside the scope of the existing market abuse regime, or which have indirect dependencies on instruments outside the scope of the market abuse regime where additional mechanisms may be needed to monitor against potential sources of abuse.

Question 1

Are the criteria set out above (and in further detail in in section 2 of the review’s report) the appropriate ones to use?

Question 2

Are there other criteria that should also be included?

3. Recommendations

Based on the criteria set out above, the review has identified the following seven major benchmarks in the FICC markets which it recommends should be brought into UK regulatory perimeter:

• Sterling Overnight Index Average (SONIA)
• Repurchase Overnight Index Average (RONIA)
• WM/Reuters’ FX benchmark rates (WMR)
• ISDAFix
• ICE Brent Futures
• LBMA Silver Price
• London Gold Fix

Question 3

Do these benchmarks meet the criteria?

Question 4

Are there other benchmarks that also fulfil these criteria? If so, can you provide an explanation of how and why they fulfil the criteria?

Question 5

Are there any specific factors to consider in the listed benchmarks that need to be taken into consideration when bringing them within the scope of regulation?

4. Impacts

The review was not tasked with analysing potential costs and benefits of bringing the recommended benchmarks within the regulatory perimeter. Prior to laying legislation to bring around the policy changes, the government will publish an impact assessment. This will be based on the experience of the costs and benefits of bringing LIBOR into the regulatory perimeter, as well as conversations with regulators and market participants.

As with LIBOR, the main affected groups will be the contributors to, and administrators and regulators of the named benchmarks. The costs are expected to stem from the following areas:

• regulators: authorisation and ongoing supervision
• administrators: systems and controls; oversight committee; approval (controlled functions); capital requirements; and authorisation
• submitters: IT systems; staff; external audits; and controlled functions application

It is important to note that many firms which would be captured as submitters to the benchmarks recommended by the review are already captured as submitters for to LIBOR. Therefore the costs incurred by these firms would only be incremental.

The expected benefits are expected to be as follows:

• improved resilience against attempted manipulation
• reduced risk of misconduct and associated fines and/or litigation risk
• increased governance and regulatory oversight
• decreased likelihood of cessation of these key benchmarks
• increased credibility and integrity of the benchmarks
• greater confidence in financial markets

These benefits have been seen in relation to LIBOR which has already been brought within the domestic regulatory perimeter.

Question 6

Do you agree that these are the areas where costs will arise?

Question 7

Do you agree that these are major expected benefits?

Question 8

How can costs and benefits best be quantified?

5. Next steps

As part of the consultation process, the government intends to hold targeted industry roundtables for representatives of affected parties. Those parties will be directly contacted. Following the consultation period, the government will provide a summary of responses along with a government response. This will then be followed by publication of an impact assessment and the laying of the necessary legislation. The proposed legislative changes will be debated in Parliament.

6. Confidentiality

Information provided in response to this consultation, including personal information, may be subject to publication or release to other parties or to disclosure in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004). If you want information, including personal data that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, amongst other things, with obligations of confidence.

In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the department.