FRANDly access to regulated benchmarks

Will new rules from the Financial Conduct Authority (FCA) ease concerns around administrators' unconstrained ability to set the price for accessing benchmarks? Lorraine Johnston, senior professional support lawyer at Ashurst, considers whether the rule to require administrators to allow fair, reasonable and non-discriminatory (FRAND) access goes far enough.

Original news

New FRAND rules proposed for benchmark administrators, LNB News 03/06/2015 85

In response to concerns about the unconstrained ability of administrators to set the prices of benchmarks, the FCA has put forward proposals for fair, reasonable and non-discriminatory access to regulated benchmarks by administrators. The proposed rules aim to limit the ability of benchmark administrators to exploit their market power in a way that might hinder effective competition. Responses to the consultation are requested by 3 August 2015.

What are the FCA's proposals in this consultation?

The FCA has announced proposals for new rules to require benchmark administrators to ensure that there is fair, reasonable and non-discriminatory access to the regulated benchmarks they administer. This new acronym--FRAND--will apply to the benchmark administrators of all regulated benchmarks, of which there are currently eight.

What is the purpose of the proposals?

The FCA acknowledges some market participants' concerns that administrators of benchmarks have an unconstrained ability to set the price for accessing those benchmarks. The FCA says it wants to ensure that benchmark administrators' power to exploit the market in a way that might hinder effective competition is curtailed. Such exploitation could be through pricing structures or barriers to access the benchmarks.

How do the proposals fit with the FCA's objectives?

The FCA is pursuing its operational objective to promote effective competition in regulated financial services, which includes regulated benchmarks. The FRAND requirements are seen by the FCA as a way to ensure that benchmark administrators' terms of access remain fair and competitive.

What action has been taken to date?

Benchmarks have only recently come into the FCA's ambit. First, there was LIBOR (following the LIBOR manipulation scandal), and then seven other benchmarks were introduced into the regime in 2014 as a result of an interim recommendation of the Fair and Effective Markets Review. The FCA has since produced rules for benchmark contributors and, more onerously, for benchmark administrators. The new rules surrounding the administration of benchmarks are intended to make the process more transparent and less susceptible to manipulation. It is this tightening of the rules over the administration of benchmarks that has raised the issue that this could lead to a distortion of pricing to access those regulated benchmarks.

Are there any special issues of concern, and how does the FCA plan to treat them?

Two key areas of concern stand out for the FCA--pricing and access to benchmarks. The FRAND proposals require a benchmark administrator to ensure non-discriminatory access to:

  • relevant price and data feeds and information on the composition, methodology and pricing of that specified benchmark, and
  • licences or other arrangements to use that specified benchmark

The FCA is also proposing requirements on benchmark administrators to grant access to the specified benchmark it administers on a fair, reasonable and non-discriminatory basis and within three months following a written request by the user. Fees must be charged at a reasonable commercial price, taking into account the price that other users pay. Different fees can be charged to different users only where this is objectively justified (such as the quantity, scope or field of use requested).

What are the next steps?

The FCA's consultation is open until 3 August 2015, with a policy statement and final rules due in Q4 2015.

How should lawyers and their clients prepare for the proposed changes?

The key action point for benchmark administrators will be to review their existing business models in relation to specified benchmarks to ensure they comply with the FRAND proposals. For most, these proposals will not be too onerous except in relation to the requirement to grant access within a three-month timescale. Many administrators may not yet have systems in place to ensure that the time period is recorded between a request for access being received and access being granted. For benchmark users, these new rules will bring confidence that benchmark administrators are not abusing their position in a restricted market.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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