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UK benchmark regulation spreads beyond LIBOR

On 22 December 2014, HM Treasury confirmed it will follow the recommendations of the Fair and Effective Markets Review (FEMR) and extend the LIBOR regulatory and supervisory framework to seven other major benchmarks:

  • Sterling Overnight Index Average (SONIA)
  • Repurchase Overnight Index Average (RONIA)
  • ISDAFix
  • WM/Reuters (WMR) London 4pm Closing Spot Rate
  • London Gold Fix (soon to be replaced by the LBMA Gold Price)
  • LBMA Silver Price
  • ICE Brent Index

Simultaneously, the FCA published a Consultation Paper discussing the proposed approach to regulate these benchmarks, as adjustments need to be made due to slightly different methodologies. In particular, some benchmarks do not have submitters.

HM Treasury recognises that the EU legislation will eventually replace the UK regulatory framework (although not the criminal portion). Nonetheless, in the Impact Assessment HM Treasury moves forward with the policy option of passing domestic legislation in the meantime. It was preferred over the “Do nothing” policy option, discarded on the basis that “the EU Regulation is not expected to be fully in place until 2017 and neither its existence nor its content are yet confirmed”.

The seven benchmarks are expected to be made both a “specified benchmark” and a “relevant benchmark” on 1 April 2015. Benchmarks administrators and benchmark submitters of a “specified benchmark” will need to apply for authorisation to the FCA and put in place robust arrangements, including:

  • Systems and controls
  • Conflicts of interest management
  • Governance and oversight arrangements
  • Monitoring arrangements
  • Adequate financial resources
  • Notifications to the FCA

The General guidance on Benchmark Submission and Administration (BENCH) will provide details of the wider FCA Handbook provisions that apply to benchmark administrators and benchmark submitters.

In addition, the criminal offence of manipulating a “relevant benchmark” will be extended to the seven benchmarks. Those found guilty of making misleading statements or creating a false or misleading impression of the value of investments that could affect such a benchmark may face a sentence of up to seven years.

The deadline for response to the Consultation Paper is 30 January 2015.

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