Out-Law News 3 min. read
20 Sep 2012, 9:56 am
Martin Wheatley of the Financial Services Authority (FSA) will co-chair the 20-strong group, which has been set up by the International Organisation of Securities Commissions (IOSCO).
IOSCO said there was a need to "identify relevant benchmark-related policy issues and develop global policy guidance and principles for benchmark-related activities of particular relevance to market regulators" in the wake of a recent scandal over the way inter-bank lending rates were set.
IOSCO's members are regulators of securities markets around the globe. The body sets standards for the regulation of those markets. The term 'securities' refers generally to rights in stocks, bonds and other financial instruments.
"As the global standard setter in the securities area, IOSCO is committed to taking necessary steps to prevent the manipulation of benchmarks and restore confidence in the use of those benchmarks in global financial markets," IOSCO said in a statement. "Benchmarks are critical to the pricing of many financial instruments. Doubts about the integrity and accuracy of benchmarks will undermine market confidence, distort the real economy, and potentially cause losses to investors and market participants."
The IOSCO said that the new Task Force should "define the types of benchmarks that are relevant to financial markets" and identify 'benchmark' policy issues to ensure that there is proper "regulatory oversight" of them.
The Task Force should also identify issues to ensure that benchmarks are calculated in accordance with "robust processes and procedures" and that there are "credible governance structures" within the "benchmark setting process" to ensure that any conflicts of interest can be addressed, it said.
The Task Force should also establish new "global policy guidance and principles, including those related to effective self regulation" around benchmarks. The guidance and principles should take into account "necessary enforcement powers, information sharing and sanctions regimes," IOSCO said.
"Given the global nature and extensive use of benchmarks in a wide range of financial markets and products, it is important to develop internationally consistent principles that ensure their credibility and integrity," Martin Wheatley said. "In leading this work, the IOSCO Task Force will collaborate with other international bodies to establish a robust set of principles, where appropriate drawing on lessons learned from the Wheatley Review and other supervisory investigations."
Wheatley is currently leading a Government-commissioned review into the process by which the reference interest rate used by UK banks is set. The review into the London Inter-Bank Offered Rate (LIBOR) was set up after the FSA began investigating whether banks had been fixing the rate.
At the end of June, Barclays became the first bank to announce that it had entered into settlement agreements with regulators in the UK and US for "misconduct" in relation to its contribution to the LIBOR rate and to its euro equivalent, EURIBOR.
LIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is widely used as the pricing basis for some $550 trillion worth of global financial instruments including interest rate and currency hedging instruments, and to set the interest rate for syndicated loans. Contributing banks submit estimated rates daily to business data provider Thomson Reuters, which carries out the calculation and publishes LIBOR rates in 10 currencies at midday every London business day.
Participation in the setting of the LIBOR rate is not currently a 'regulated activity' under the Financial Service and Markets Act. Wheatley is considering whether regulation or changes to the rate's governance arrangements are necessary and, if so, what if any financial stability consequences would emerge as a consequence of a move to a new regime. In his review he will also consider the feasibility of replacing banks' estimates of the rate at which they are borrowing at any given time with actual trade data, as well as other alternative rate-setting processes.
Wheatley has also been asked to provide "provisional policy recommendations" in respect of other price-setting mechanisms in financial markets. He is expected to report on the matter before the end of this month.
The Serious Fraud Office (SFO), which is responsible for investigating and prosecuting serious and complex fraud in the UK, is currently investigating the possibility of bringing criminal charges against major banks in relation to the LIBOR rate. Depending on the results of its investigation it could prosecute under existing fraud or false accounting laws.
