Flagship benchmarks benchmarked

On 22 July, IOSCO published a Review of the implementation of the principles on financial benchmarks by the administrators of Euribor, Libor and Tibor.

The 150 page review covers the degree of implementation of the principles as of 11 April 2014, only seven months after the final principles were released. The significance of these three benchmarks probably justifies this extremely tight timing. Two main concerns are raised by the review team.

Principle 7 on data sufficiency could not be rated at all. The administrators have been unable to provide the required data or analyses to demonstrate the accuracy and reliability of the benchmark, in particular as a measure of interbank unsecured funding transactions. A definition of “active” market should be developed, as well as methodologies to provide a basis for deciding whether the submissions are “anchored” in the market.

In addition, Principle 9 on transparency of benchmark determinations has not been implemented. In order to satisfy this principle, the administrators must publish an explanation for each benchmark determination. Further collaboration between the administrators and the submitters might be required, although the exchange of sensitive or confidential information concerns some submitters.

Summary of implementation

Principle		Euribor	Libor	Tibor
1	Overall responsibility of the administrator	Fully	Fully	Fully
2	Oversight of third parties	Fully	Fully	Broadly
3	Conflicts of interest for administrators	Fully	Partly	Partly
4	Control framework for administrators	Broadly	Broadly	Broadly
5	Internal oversight	Broadly	Broadly	Broadly
6	Benchmark design	Partly	Partly	Not Implemented
7	Data sufficiency	Not Rated	Not Rated	Not Rated
8	Hierarchy of data inputs	Fully	Fully	Broadly
9	Transparency of benchmark determinations	Not Implemented	Not Implemented	Not Implemented
10	Periodic review	Fully	Fully	Broadly
11	Content of the methodology	Broadly	Broadly	Broadly
12	Changes to the methodology	Broadly	Broadly	Broadly
13	Transition	Partly	Partly	Broadly
14	Submitter code of conduct	Broadly	Broadly	Broadly
15	Internal controls over data collection	Not Applicable	Not Applicable	Not Applicable
16	Complaints procedures	Broadly	Broadly	Broadly
17	Audits	Broadly	Broadly	Broadly
18	Audit trail	Broadly	Broadly	Fully
19	Cooperation with regulatory authorities	Fully	Fully	Broadly

 

Each of the administrators has received recommendations from the review team in order to finalise implementation of the IOSCO’s principles. A work plan should be developed and submitted to their regulatory authority by end 2014.

A flawless implementation of IOSCO principles by these flagship benchmarks is crucial, even though strictly speaking they have no legal force. The EU proposal for regulation on benchmarks is expected in early 2015 to follow IOSCO principles, but this time with full legal force over a wide range of benchmarks.

IOSCO intends to conduct a second review by mid-2015.

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