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Compound Growth

2nd March 2016

New European Benchmarking Rules Expected:

In recent years, some of the biggest fines in Financial Services have been related to benchmark manipulation, just take a look at the fines below!

The FCA has now advised the EU is developing new legislation to introduce a common framework and consistent approach to providing benchmarks. Set to apply across the EU, the Regulation will regulate the running, contribution to and use of benchmarks used in financial instruments traded on trading venues, consumer credit contracts and mortgage contracts, or used to measure the performance of investment funds.

This is set to affect those within the industry that:

• provide a benchmark;
• contribute input data to a benchmark in the EU; or
• use a benchmark provided in the EU or in a third country.

The FCA’s Head of Markets Policy, Mr Edwin Schooling Latter provided more information on the expected new regulation in his speech given in February entitled Do I need to worry about benchmark regulation?

Current UK Benchmark regulation:

Following a number of benchmark cases on LIBOR, Forex and Gold, back in March 2013, the regulator at the time (the FSA) published its Policy Statement (PS13/6) finalising new rules for regulating benchmark activities in UK. Thus today’s current Benchmark Rules come into force in the UK on 2 April 2013. The rules mean that the administrators and submitters to eight benchmarks are subject to the FCA’s standards of governance, controls, accountability, management of conflicts of interest and record keeping.  Two of the key provisions of the UK current benchmark rules include the requirements for:

• benchmark administrators to corroborate submissions and monitor for any suspicious activity; and
• those submitting data to benchmarks to implement and maintain a clear conflict of interests policy and appropriate systems and controls.

In addition, the implementation of the rules created two new significant influence functions for benchmark administration and benchmark submission.

Benchmark Fines:

But which were the benchmark scandals that caused such change? Take a look at some of the record benchmark fines below:

• Barclays FX failings (May 2015)                                                   £284m
• UBS FX failings (Nov 2014)                                                          £234m
• Deutsche Bank Libor and Euribor failings (Apr 2015)                £227m
• Citibank FX failings (Nov 2014)                                                  £226m
• JPMorgan Chase Bank FX failings (Nov 2014)                             £222m
• RBS FX failings (Nov 2014)                                                         £217m
• HSBC FX failings (Nov 2014)                                                       £216m
• UBS Libor failings (Dec 2012)                                                     £160m
• Rabobank Libor failings (Oct 2013)                                            £105m
• Lloyds Bank of Scotland Libor & BBA Repo failings (Jul 2014)    £105m
• RBS Libor failings (Feb 2013)                                                      £ 87m
• Barclays Libor failings (Jun 2012)                                               £ 60m
• Barclays gold failings (May 2014)                                                £ 26m
• ICAP Libor failings (Sep 2013)                                                    £ 14m
• Martin Brokers Libor failings (Mar 2014)                                     £ 630,000

Thematic Review on Financial Benchmarks

Later on last year (in July 2015), the FCA then issued TR15/11, a report that presented the findings from the FCA’s thematic review of firms’ oversight and controls in relation to financial benchmarks.

The Thematic Review was undertaken not only because financial benchmarks play a significant role in the global economy and impact a multitude of financial instruments and contracts used by companies, governments and consumers, but also to assess the extent to which firms had learnt lessons from previous failures around benchmark activities and whether firms had taken appropriate action in response.

The review found that whilst firms might have established a number of positive changes to improve governance and controls in relation to benchmark activities, the FCA believed that “significant further work is needed to ensure that all risks are managed separately”. The FCA continued in informing that it is essential that firms’ senior management “pay heed to the findings” as well as take “steps necessary to identify and resolve any outstanding issues”.

Action required by affected firms:

Thus for those affected firms, the FCA advise it expected them to ensure action had been taken to:

• identify, manage and control the risks arising from their benchmark activities;
• put in place appropriate oversight and controls; and
• instil a culture in which market integrity and consumers interests are at the heart of how they run their businesses

Benchmark Regulation

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.

From the FCA:

"We have seen widespread historic misconduct in relation to benchmarks. It is now critical that firms act to restore trust and confidence in the system. Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.

Tracey McDermott, FCA, Director of supervision, investment, wholesale and specialists, July 2015.