07 March 2013

ESAs: Joint Letter to Commissioner Barnier on the possible regulatory framework for benchmark activities

The authorisation and supervision of benchmark activities should cover areas that are also the focus of the Recommendations and Principles and include particularly sound governance, systems and controls, audit requirements, and conflict of interest issues. Obligations regarding good governance and processes, sound methodology, conflict-of-interest mitigation, and transparency requirements should be addressed to the providers of benchmarks rather than being requirements on the individual benchmarks. The regulated activity should also cover all stages of typical benchmark-setting processes, including benchmark data submission, benchmark administration, benchmark calculation, or publication of benchmarks, as well as the use of benchmarks. Regulation and supervision would thus cover all relevant institutions including submitting institutions, the benchmark administrator and related parties such as calculation agents.

The potential scope of benchmark activity is very wide, and care will need to be taken to ensure that the impact of detailed authorisation and supervision requirements is proportionate to the risks that individual activities pose. Building on recent experience, benchmarks based on reporting panels, such as interbank reference rates, should be fully within such a new regulatory regime, but benchmarks designed on other models may also be subjected to certain requirements.

Any regulatory requirements should ensure consistency of the regime and supervisory application across the EU, given the genuine cross-border nature of the benchmark industry and related institutions. Therefore, to minimise inconsistency through national implementation measures the regime should be set out in a regulation rather than a Directive. Strong cooperation between regulators and supervisors will also be necessary, as the recent investigations around Euribor and Libor have shown.

2. Provision of benchmarks by private or public bodies

Whether benchmarks are provided by public or private bodies, it is imperative that there is sufficient distance between the ownership and control of the benchmark administrator and those that have an interest in the outcome of the rate setting process. In this regard the governance framework needs to clearly ensure appropriate separation of roles and avoidance of conflicts of interest in the governance mechanism. The authorisation process should focus on these issues, which might lead to certain providers being ruled out in future as not offering sufficient independence.

3. Market liquidity and contingency

The ESAs submit that a future EU regulatory framework for benchmarks should not prejudice from the start the choice of the method for calculating benchmarks, in particular the choice between transactions-based and panel-based systems. Nonetheless, there should be regulatory requirements that recognise the importance of a minimum level of transactions or liquidity as an essential part of the set-up criteria for any benchmark. There should also be a requirement to regularly review benchmarks, based on ongoing liquidity and number of transactions in the market concerned, number of contributors or submitters and overall usage of the benchmark in the financial markets. The level of minimum liquidity might need to be adjusted for new benchmarks, to avoid impeding the development of new benchmarks. In any case, there should be full transparency around the liquidity characteristics of any new benchmark product.

Especially in the area of interbank reference rates, discontinuities in benchmarks may have incalculable consequences for financial market stability in the EU and elsewhere. In order to ensure continuity, regulatory requirements should promote:

• clearly-defined contingency plans for administrators and contributing parties to ensure the generation of accurate benchmarks at every delivery point specified in the benchmark regime;
• contingency provisions in financial contracts referring to benchmarks which govern situations in which the referenced benchmark should not be available; and
• the continuity of panel participation, as recently recognised by your Statement of 8 February 2013 in which you express the expectation that the proposal for a regulatory framework for benchmarks will include the power to impose mandatory submissions for systemic benchmarks.

Full letter

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