GFMA sets principles for regulating financial benchmarks
The Global Financial Markets Association
(GFMA), a sell-side trade body, has proposed a series of guidelines for
bolstering the governance of financial benchmarks.
The best practice guidelines are the
sell-side response to the recent LIBOR fixing scandal. UK bank Barclays was
fined US$450 million by UK and US regulators for manipulating LIBOR – the
benchmark that underpins a wide range of derivatives products, including
interest rate swaps, forward rate agreements and inflation swaps. A number of
other LIBOR-setting banks are also under investigation.
The GFMA paper relates to indices used for pricing financial instruments and excludes customised indices used for
pricing bespoke, bilateral transactions and those issued by public
sector entities. It suggests regulators should impose new legislation to
ensure its guidelines are applied to systemically important indices.
It states that the overall responsibility
for the quality and integrity of a benchmark should be the responsibility of a
governance body – or sponsor – appointed by the entity or group that develops and issues a
benchmark. This would include oversight of methodology and
relationships between those responsible for the benchmark and third-parties.
The benchmark sponsor would also clearly
define the roles and responsibilities of those involved in setting benchmarks
and ensure any changes in methodology were made transparent.
To ensure the quality of a benchmark, the
GFMA principles assert there should be sufficient trading activity
among a broad range of participants in the underlying instruments on which a
benchmark is based. Other principles include appropriate controls for
maintaining and distributing a benchmark, data collection, record keeping and
Alex McDonald, CEO of the Wholesale Markets
Brokers’ Association, told theTRADEnews.com he considered the guidelines
to be adequate and warned against financial benchmarks policies being too
“Some may question whether these principles
should go further, i.e. by directly regulating benchmarks or those that produce
them,” he said. “However, it should be recognised that benchmarks are created
by the market, for the market and need to be flexible, so subjecting them to rules
that are too onerous would be counterintuitive.”
McDonald added that separate guidelines on
benchmarks are currently being developed by the International Organisation
of Securities Commissions. Due by the end of the year, he believed they would likely
mirror many of the GFMA proposals.
Martin Wheatley, CEO-designate of the
Financial Conduct Authority, a division of UK’s Financial Services Authority, published
a discussion paper on potential LIBOR reforms last month, while the Bank of
England yesterday said it would conduct a review on the reference rates used in
financial markets in conjunction with other central banks. Formal proposals
following the Wheatley review are expected by the end of the month.