The Global Financial Markets Association (GFMA) yesterday published best practice guidelines for financial benchmarks.
The guidelines were born out of the recent LIBOR scandal, which highlighted the need for a broader consideration of financial benchmarks. GFMA developed principles for financial benchmarks, covering the areas of governance, benchmark methodology and quality, and controls, which have been developed noting the issues described in a number of the current regulatory reviews, including The Wheatley Review of LIBOR. In a covering letter to regulators, GFMA has also called for legislative steps to ensure the guidelines are applied to systemically important indices.
Essentially, GFMAs “Principles for Financial Benchmarks” are intended to draw attention to the need for international standards that apply to the issuance of financial benchmarks; to offer the principles as a basis for crafting such international standards; and to urge the adoption of the principles by organizations responsible for developing and issuing benchmarks.
In its covering letter to regulators, GFMA recommends that all systemically important financial benchmarks should be subject to regulatory oversight. A key recommendation is that, where a benchmark sponsor or other participant is already prudentially regulated, then that regulator should oversee the implementation of the agreed-upon standards. If the sponsor is not prudentially regulated, then GFMA recommends that appropriate administrative or legislative steps should be taken to ensure application of the standards.
Principles framework cover the following key areas:
– Governance: a sponsor is ultimately responsible for the quality and integrity of a benchmark; a sponsor should define clearly the roles and responsibilities of the participants in the benchmark process; a sponsor should operate with transparency with respect to benchmark development and changes, taking due account of impacts on process participants and anticipated end users.
– Benchmark methodology and quality: a sponsor should ensure that there is a methodology for conducting the benchmark price assessment that relies on sound data and accurately reflects market conditions; to promote the quality of a benchmark over time, a sponsor should follow best practice design elements.
– Controls: a sponsor should ensure that there is an appropriate control framework for conducting and maintaining the benchmark process and for distributing the benchmark price assessment; a sponsor, or by delegation the sponsors calculation agent, should maintain documentation and keep records showing all inputs to the benchmark price assessment, the application of these inputs to determine the final benchmark price assessment, and the methodology utilized, as appropriate; a sponsor should ensure that there are appropriate controls over the process for collecting data for use in a benchmark price assessment; where the benchmark price assessment requires the submission of data by a third party contributor, a sponsor should ensure that there are standards for contributions, specified in a Contributor Code of Conduct, and contributors should employ appropriate controls over data submissions
Simon Lewis, GFMAs chief executive commented: In light of the ongoing regulatory review of financial benchmarks, GFMA members have come together to determine a set of best practices, which are needed to enhance the integrity of global financial markets. The key benchmark indices around the world need to be subject to consistent, transparent and sound practices to ensure the smooth functioning and efficiency of global financial markets. GFMAs principles are a major step forward in helping achieve this.
Commenting on the guidelines, Josh Galper of consulting firm Finadium said: The principals seem reasonable on the surface. The GFMA appears to be advocating for regulatory oversight over benchmarks of any sort. I would add to this that benchmarks are most suitable when they are based on observed transactions as opposed to indications or ideas on the market. The former gives hard data on an actual occurrence; the latter gives more opportunity for speculation and guesswork on what the right number ought to be.
(JDC)