New rules will ensure fair access to regulated financial benchmarks, says FCA

The Financial Conduct Authority (FCA) has proposed introducing a fair, reasonable and non-discriminatory (FRAND) pricing obligation rule in relation to benchmarks, ahead of EU-wide rules due to come into force in 2019. The new rule, which would be added to the existing benchmark requirements in the Market Conduct Sourcebook (MAR 8), would apply to all eight benchmarks currently regulated by the FCA, it said.

It is seeking views on its proposed approach until 3 August, according to a consultation paper.

The introduction of a FRAND obligation is intended to address concerns raised by some respondents during the FCA's original consultation on extending the benchmark regulation regime to seven additional benchmarks from April this year, the regulator said. Previously, its focus had been on ensuring the "integrity, reliability and credibility" of the affected benchmarks, rather than tackling administrators' market power and its potential effects on competition.

The FCA said that the eight regulated benchmarks were "the most widely used benchmarks in the markets to which they relate", meaning that users were not easily able to switch to an alternative.

It was also within the power of each benchmark’s administrator to control or even vary the terms and conditions of access, which customers would be forced to accept due to the lack of alternative options.

"While the possession of market power is not in itself anti-competitive, there is a risk that benchmark administrators could behave in anti-competitive ways and exploit their market power in a way that may adversely affect competition," the FCA said.

"The most obvious way of exercising market power is to raise prices above the level that would prevail in a competitive market. But there are others: an undertaking with market power can charge discriminatory prices that favour certain firms over others in a way that might distort competition … While administrators must be able to recover these costs to remain viable, we are concerned to ensure that they do not earn excessive returns, or distort competition in other ways, as a result of any market power that administering the benchmark may give them," it said.

The new rules would require benchmark administrators to provide access to and licences to use benchmarks within three months of a written request, with reference to FRAND terms and conditions including in relation to price. They would also state that different fees could only be charged to different users where this was "objectively justified, having regard to reasonable commercial grounds such as the quantity, scope or field of use requested", according to the consultation.

The FCA's proposed approach is in line with the FRAND requirements for benchmark provision due to be introduced in 2019 under the Markets in Financial Instruments Regulation (MiFIR), it said. The new rules would apply to "existing and future pricing and licensing arrangements" and not to fees already paid, according to the consultation.

"By putting in place a rule and guidance in advance, we intend to reduce uncertainty as to what price a benchmark administrator may charge," it said.

Setting and administrating the LIBOR rate became regulated activities in 2013, backed by a new criminal offence of making false and misleading statements in relation to LIBOR. The regulatory rules and criminal offence were extended to cover seven additional benchmarks used in foreign exchange, commodities and swaps transactions on 1 April 2015, as an early recommendation of the Fair and Effective Markets Review currently being conducted by the Treasury, FCA and Bank of England.

Rates covered by the new rules include the Sterling Overnight Index Average (SONIA) and Repurchase Overnight Index Average (RONIA), which are reference rates used for overnight index swaps; dominant global foreign exchange benchmark WM/Reuters 4pm London Fix; and ISDAFix, the principal global benchmark for swap rates. They also apply to the London Gold Fixing and LBMA Silver price rates; as well as the ICE Brent Index, which acts as the crude oil futures market's principal financial benchmark.