FSA consults on benchmark changes

LIBOR

The FSA has proposed new rules and regulations for financial benchmarks.

This comes after the recommendations of the Wheatley Review of the London Interbank Offered Rate (LIBOR).

Benchmarks have historically been set by the financial markets themselves, and existed outside of any regulatory regime. In the case of LIBOR, this industry-led approach has failed. On 2 July 2012 the Chancellor of the Exchequer commissioned Martin Wheatley, managing director of the FSA and CEO designate of the Financial Conduct Authority (FCA), to undertake a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime.

On 28 September 2012 ‘The Wheatley Review of LIBOR’ was published, which included a 10-point plan for comprehensive reform of LIBOR. One of its key recommendations was that while the setting of LIBOR should remain an industry-led activity; the submission to, and administration of, the rate should be regulated by the FCA. On 17 October 2012 the government accepted the Review’s recommendations in full, and amended the upcoming Financial Services Bill (the Bill) accordingly.

The FSA has considered both the Wheatley Review recommendations and the Treasury’s proposed legislative amendments in designing an approach to regulating the setting of benchmarks. At least initially, the only ‘regulated benchmark’ in the UK will be LIBOR. However, the new regime provides a framework for regulation that can be extended to cover additional benchmarks in the future, were the government to consider it appropriate to do so.

The proposals include:

The FSA also seeks comments on ensuring the continuity of LIBOR and broadening participation in the rate. The Wheatley Review concluded that global markets benefit from the continuing participation of major firms in the LIBOR panels and that market integrity could be undermined if submitting firms were to leave them. In addition the Review noted that larger panel sizes would benefit the accuracy and reliability of the benchmark.

As a consequence, the FSA has asked for feedback on how best to broaden the participation in LIBOR panels, including the use of the FCA’s powers to require firms to contribute to the rate on a permanent basis which the government is proposing to grant. As set out in chapter 4 of the Consultation Paper, it would be beneficial to the quality of the LIBOR benchmark, and therefore wider market integrity, if firms were to review their LIBOR participation against the FCA’s suggested criteria and approach the administrator with a view to submitting to LIBOR Panels if they concluded that this was appropriate.

Wheatley said: “Confidence and trust are critical to financial markets. The disturbing events uncovered in the manipulation of LIBOR have severely damaged that trust. Today’s proposals will bring in clear rules for the setting and governance of benchmarks and are a key step to ensuring the integrity of LIBOR.”

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