IOSCO Proposes Principles for Financial Benchmarks

The International Organisation of Securities Commissions (IOSCO) Task Force on Financial Market Benchmarks (the Task Force) – which is co-chaired by Martin Wheatley, chief executive officer (CEO) of the new UK watchdog the Financial Conduct Authority (FCA), has published its proposed Principles for Financial Benchmarks (the Principles) for consultation.

It said that by setting out clear standards for benchmark administrators and other relevant bodies on benchmark quality, methodology, governance, and accountability mechanisms, the Principles are intended to strengthen the reliability and integrity of benchmarks used in financial markets. This goes beyond work on interest rate benchmarks, to include other forms of references rates, indices and prices.

The FCA’s work on reforming the benchmark London Interbank Offered Rate (Libor) has helped inform the development of this wide set of Principles. Building on this, the FCA is undertaking further work to examine any potential weaknesses in the wider range of benchmarks captured under the IOSCO Principles and will be writing to firms about this shortly.

Areas covered by the Principles include:

  • Roles and responsibilities of benchmark administrators (and where applicable, third parties and contributors to benchmarks).
  • Managing conflicts of interest.
  • Developing a control framework.
  • Benchmark design and inputs.
  • Benchmark methodology and periodic review.
  • Transition.
  • Complaints procedures.
  • Audit requirements and record keeping.
  • Co-operation with relevant regulatory authorities.

“Benchmarks play a vital role in the confidence and integrity of financial markets,” said Martin Wheatley, CEO of the FCA and co-chairman of the IOSCO Task Force on Financial Market Benchmarks. “The Principles proposed today are a key step in enhancing the oversight and quality of benchmarks.

“The FCA’s leading role in developing the Principles reflects the priorities set out in our new wholesale conduct strategy by ensuring that participants in financial markets have the means of assessing the quality of their contribution and the quality of the benchmark they use.

“Through IOSCO, the FCA will continue to work closely with the European and international community to establish clear standards for effective global benchmarks.  Once agreed, the Principles will be reflected in future reviews or additional supervisory activity of benchmarks undertaken by the FCA.”

Implementation of the PFMIs

In a separate announcement, IOSCO and the Committee on Payment and Settlement Systems (CPSS) said that they have started the process of monitoring implementation of the Principles for financial market infrastructures (the PFMIs), which are international standards for payment, clearing and settlement systems, including central counterparties and trade repositories. They are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks. The PFMIs were issued by CPSS-IOSCO in April 2012 and jurisdictions worldwide arre currently in the process of implementing them into their regulatory frameworks to foster the safety,efficiency and resilience of their financial market infrastructures (FMIs).

The two bodies added that full, timely and consistent implementation of the PFMIs is fundamental to ensuring the safety, soundness and efficiency of key FMIs and for supporting the resilience of the global financial system. In addition, the PFMIs play an important part in the G20’s mandate that all standardised over-the-counter (OTC) derivatives should be centrally cleared. Global central clearing requirements reinforce the importance of strong safeguards and consistent oversight of derivatives central counterparties (CCPs) in particular. CPSS and IOSCO members are committed to adopt the principles and responsibilities contained in the PFMIs, in line with the G20 and Financial Stability Board (FSB) expectations.

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