Regulating financial benchmarks

Regulating financial benchmarks

The Financial Conduct Authority (FCA) recently published a consultation paper seeking views on its proposed regulation of seven additional benchmarks. Tom Dane, a partner at Nabarro LLP, takes a look at the proposals and their potential ramifications.

Original news

FCA consults on further benchmark regulation, LNB News 22/12/2014 125

The FCA will, from 1 April 2015, regulate seven additional UK-based financial benchmarks in the fixed income, commodity and currency markets. This extends the FCA’s initial regulation of LIBOR, as introduced by HM Treasury in 2013, and implements the recommendations of the Fair and Effective Markets Review. In light of this extension, the FCA is consulting on extending its approach to regulating LIBOR to the firms that administer and contribute data or information to the other benchmarks it will regulate in 2015, including Sonia and Ronia, WM/Reuters London 4pm Closing Spot Rate and ISDAFIX. Those wishing to respond to this consultation should do so by 30 January 2015.

What are the FCA’s proposals in this consultation?

Following the misconduct identified in relation to the setting of the London Interbank Offered Rate (LIBOR) benchmark in 2012, the FCA was given power to regulate the setting of LIBOR from April 2013.

The proposals in the FCA Consultation Paper 14/32 relate to the basis on which the FCA will regulate seven additional major UK-based financial benchmarks in the currency, fixed income and commodity markets from 1 April 2015. The proposed extended scope of regulation implements recommendations in the government’s Fair and Effective Markets Review (a review which is currently ongoing).

The proposals relate to firms that (i) administer and (ii) submit data for the purposes of compiling benchmarks. The seven additional benchmarks are as follows:

  • WM/Reuters London 4pm Closing Spot Rate, being the dominant global foreign exchange benchmark
  • London Gold Fixing and the LBMA Silver Price, which determine the price of gold and silver in the London market
  • ISDAFIX, being the principal global benchmark for swap rates and spreads for interest rate swap transactions
  • SONIA (Sterling Overnight Index Average) and RONIA (Repurchase Overnight Index Average), which both act as reference rates for overnight index swaps
  • ICE Brent Index, traded on the ICE Futures Europe (IFEU) exchange, which acts as the crude oil futures market’s principal financial benchmark

The consultation paper acknowledges that there are practical differences between the ways in which various benchmarks are set. Accordingly, the current provisions of Chapter 8 of the FCA’s

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