Independent oversight to form part of new benchmark regime

New paper says anyone running a benchmark should have independent oversight to avoid conflicts of interest.

The European Securities and Markets Authority (ESMA) has outlined tough new oversight rules as part of its upcoming Benchmark Regulation, which could require firms to employ independent committees to oversee their operations.

In a discussion paper, ESMA said that firms which create their own benchmarks need to have a benchmark administrator in place and will need to provide effective oversight to challenge the management of their benchmarks.

In cases where the administrator is wholly owned or controlled by its contributors or users, such as an asset manager using an internal benchmark to track the performance of its own exchange-traded funds, then an independent committee will be needed to ensure there are no conflicts of interest.

ESMA said such committees will be responsible for challenging decisions made by the management body and, where appropriate, will report on any misconduct directly to relevant competent authorities, such as the local financial regulator.

The discussion paper also highlights a significant preference for benchmarks to use transaction data, saying: “[transaction data] is considered less susceptible to manipulation than non-transaction data. Therefore, if available and appropriate, input data should be transaction data.”

This proposal highlights the unease surrounding contributed benchmarks in the wake of the Libor scandal, when some traders allegedly conspired to manipulate the rate of Libor and other similar benchmarks to profit from it.

For those benchmarks that must be based on contributions, administrators will need to establish a code of conduct to specify the obligations of contributors, rejecting submissions by those who do not adhere to this code.

The new rules are likely to push up the cost of running benchmarks, particularly where an asset manager uses their own internal benchmark.

The consultation is open until 31 March and ESMA plans to hold an opening hearing on 29 February in Paris. The responses will form the basis of a follow-up consultation due in Q3 2016.