Industry issues

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 independent reviews.

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 prescriptive.

Alex McDonald, WMBA“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.

Anish Puaar +44 (0)20 7397 3817 anish.puaar@thetrade.ltd.uk