ICAP Adopted IOSCO Principles for Financial Benchmarks Ahead of European Legislation

The International Organization of Securities Commissions has issued a list of principles for financial benchmarks set to prevent further market

icap-logoThe independent over-the-counter markets data provider, ICAP’s Information Services division, which operates benchmarks for the financial services industry announced today that it has voluntarily adopted the IOSCO Principles for Financial Benchmarks which are likely to form the basis of impending European legislation.

These principles were developed by the International Organization of Securities Commissions’ (IOSCO) Task Force on Financial Market Benchmarks. IOSCO created the task force following the worldwide investigations and enforcement actions over the alleged manipulation of major interest rate benchmarks. The organization was concerned that the revelations from the investigations and the news of severe enforcement actions raised doubts over the fragility of benchmarks, in terms of  their integrity, and could potentially undermine market confidence.

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ioscoIOSCO is the international body that brings together the world’s securities regulators. IOSCO develops, implements and promotes adherence to recognized standards for securities regulation, and is working intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda. IOSCO’s members include over 120 securities regulators overseeing more than 95% of the world’s securities markets.

The major interest reference rates (such as LIBOR and EURIBOR) are widely used in the global system as benchmarks for a broad range of financial products and contracts. The cases of attempted market manipulation and false reporting of reference rates have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates. The FSB warned that uncertainty surrounding the integrity of these reference rates represents a potentially serious source of vulnerability and systemic risk. Against this background, the G20 asked the FSB to undertake a fundamental review of major interest rate benchmarks and plans for reform to ensure that interest rate benchmarks are robust.

The IOSCO principles, which were the result of the review, are not mandatory in any jurisdiction yet, but regulations based on them are assumed to be so in the future as part of the reforms. ICAP’s Information Services division has implemented the principles without legislation, whether to preempt the need to do it later or for brand purposes, as they used the “adhere to the IOSCO” label today when launching Repo Funds Rate Euro, a new daily repo index for Eurozone sovereign bonds. The principles seem reasonable to demand of a benchmark and the main benefit is the apparent transparency that will arise.

List of IOSCO Principles for Financial Benchmarks:

1. Overall Responsibility of the Administrator – The Administrator should retain primary responsibility for all aspects of the Benchmark determination process.

2. Oversight of Third Parties -Where activities relating to the Benchmark determination process are undertaken by third parties, for example collection of inputs, publication or where a third party acts as Calculation Agent, the Administrator should maintain appropriate oversight of such third parties.

3. Conflicts of Interest for Administrators – To protect the integrity and independence of Benchmark determinations, Administrators should document, implement and enforce policies and procedures for the identification, disclosure, management, mitigation or avoidance of conflicts of interest. Administrators should review and update their policies and procedures as appropriate. Administrators should disclose any material conflicts of interest to their users and any relevant Regulatory Authority, if any.

4. Control Framework for Administrators– An Administrator should implement an appropriate control framework for the process of determining and distributing the Benchmark. The control framework should be appropriately tailored to the materiality of the potential or existing conflicts of interest identified, the extent of the use of discretion in the Benchmark setting process and to the nature of Benchmark inputs and outputs. The control framework should be documented and available to relevant Regulatory Authorities, if any. A summary of its main features should be Published or Made Available to Stakeholders.

5. Internal Oversight– Administrators should establish an oversight function to review and provide challenge on all aspects of the Benchmark determination process. This should include consideration of the features and intended, expected or known usage of the Benchmark and the materiality of existing or potential conflicts of interest identified.
The oversight function should be carried out either by a separate committee, or other appropriate governance arrangements. The oversight function and its composition should be appropriate to provide effective scrutiny of the Administrator. Such oversight function could consider groups of Benchmarks by type or asset class, provided that it otherwise complies with this Principle.

6. Benchmark Design– The design of the Benchmark should seek to achieve, and result in an accurate and reliable representation of the economic realities of the Interest it seeks to measure, and eliminate factors that might result in a distortion of the price, rate, index or value of the Benchmark.

7. Data Sufficiency– The data used to construct a Benchmark determination should be sufficient to accurately and reliably represent the Interest measured by the Benchmark and should be based on prices, rates, indices or values that have been formed by the competitive forces of supply and demand in order to provide confidence that the price discovery system is reliable; and be anchored by observable transactions entered into at arm’s length between buyers and sellers in the market for the Interest the Benchmark measures in order for it to function as a credible indicator of prices, rates, indices or values.

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8. Hierarchy of Data Inputs– An Administrator should establish and Publish or Make Available clear guidelines regarding the hierarchy of data inputs and exercise of Expert Judgment used for the determination of Benchmarks.

9. Transparency of Benchmark Determinations– The Administrator should describe and publish with each Benchmark determination, to the extent reasonable without delaying an Administrator publication deadline.

10. Periodic Review– The Administrator should periodically review the conditions in the underlying Interest that the Benchmark measures to determine whether the Interest has undergone structural changes that might require changes to the design of the Methodology. The Administrator also should periodically review whether the Interest has diminished or is non-functioning such that it can no longer function as the basis for a credible Benchmark.

11. Content of the Methodology– The Administrator should document and Publish or Make Available the Methodology used to make Benchmark determinations. The Administrator should provide the rationale for adopting a particular Methodology. The Published Methodology should provide sufficient detail to allow Stakeholders to understand how the Benchmark is derived and to assess its representativeness, its relevance to particular Stakeholders, and its appropriateness as a reference for financial instruments.

12. Changes to the Methodology– An Administrator should Publish or Make Available the rationale of any proposed material change in its Methodology, and procedures for making such changes. These procedures should clearly define what constitutes a material change, and the method and timing for consulting or notifying Subscribers (and other Stakeholders where appropriate, taking into account the breadth and depth of the Benchmark’s use) of changes.

13. Transition-Administrators should have clear written policies and procedures, to address the need for possible cessation of a Benchmark, due to market structure change, product definition change, or any other condition which makes the Benchmark no longer representative of its intended Interest. These policies and procedures should be proportionate to the estimated breadth and depth of contracts and financial instruments that reference a Benchmark and the economic and financial stability impact that might result from the cessation of the Benchmark. The Administrator should take into account the views of Stakeholders and any relevant Regulatory and National Authorities in determining what policies and procedures are appropriate for a particular Benchmark.

14. Submitter Code of Conduct– The Administrator should develop guidelines for Submitters(“Submitter Code of Conduct”), which should be available to any relevant Regulatory Authorities, if any and Published or Made Available to Stakeholders.

15. Internal Controls over Data Collection– When an Administrator collects data from any external source the Administrator should ensure that there are appropriate internal controls over its data collection and transmission processes. These controls should address the process for selecting the source, collecting the data and protecting the integrity and confidentiality of the data. Where Administrators receive data from employees of the Front Office Function, the Administrator should seek corroborating data from other sources.

16. Complaints Procedures– The Administrator should establish and Publish or Make Available a written complaints procedures policy, by which Stakeholders may submit complaints including concerning whether a specific Benchmark determination is representative of the underlying Interest it seeks to measure, applications of the Methodology in relation to a specific Benchmark determination(s) and other Administrator decisions in relation to a Benchmark determination.

17. Audits– The Administrator should appoint an independent internal or external auditor with appropriate experience and capability to periodically review and report on the Administrator’s adherence to its stated criteria and with the Principles. The frequency of audits should be proportionate to the size and complexity of the Administrator’s operations.

18. Audit Trail– Written records should be retained by the Administrator for five years, subject to applicable national legal or regulatory requirements

19. Cooperation with Regulatory Authorities– Relevant documents, Audit Trails and other documents subject to these Principles shall be made readily available by the relevant parties to the relevant Regulatory Authorities in carrying out their regulatory or supervisory duties and handed over promptly upon request.


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