Consultation on New Benchmarks entering the Regulatory Perimeter

1 10 2014

images-10The Fair and Effective Financial Markets Review (FEMR or the “review”) – a triumvirate headed by Nemat Minouche Shafik (Bank of England) and co-chaired by Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) – has the twofold objective of (i) reinforcing confidence in the fairness and effectiveness of wholesale financial market activity conducted in the United Kingdom and (ii) influencing the international debate on trading practices, including highlighting issues that can only be addressed through co-ordinated international action. The review, which is expected to produce a final report by June 2015, focuses on both regulated and unregulated wholesale markets – such as fixed-income, currency and commodity markets, including associated derivatives and benchmarks – in relation to which most of the recent concerns about misconduct have arisen.

However, at the Chancellor of the Exchequer’s invitation, until the delivery of the final report in June 2015, the review has recommended a list of additional major benchmarks across the fixed income, currency and commodity markets (FICC) that should be included in the regulatory framework originally implemented in the wake of the LIBOR scandal. The review considers the Wheatley Review of LIBOR 2012 to be the blueprint for reform and recalls that Mr Wheatley had envisaged adding further benchmarks to the present LIBOR regime (see here). The ambit of the review includes matters such as trading practices, scope of regulation, supervision of firms and markets and the impact of recent and forthcoming regulation.

To recap, the Wheatley Review introduced the present legislative framework for financial market benchmarks and the legislation created two new regulated activities, namely (a) administering a specified benchmark and (b) providing information in relation to a specified benchmark. These new regulated activities entered into force via amendments to the Financial Services and Markets Act 2000 and the associated Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and require that firms that either contribute to or administer any benchmark designated in secondary legislation must be authorised by the FCA.

Moreover, among other things, in order to preserve the integrity of the market, section 91 of the Financial Services Act 2012 (which provides impetus to the FCA’s powers of criminal prosecution) created criminal liability for the making of a false or misleading statement or a false or misleading impression in connection with the setting of a relevant benchmark. Furthermore, the regulatory regime imposes specific rules and guidance on administrators of, and submitters to, specified benchmarks. Breaching any of the FCA’s rules and principles incurs sanctions such as financial penalties, suspensions and censures on authorised firms.

Adopting the definition of “benchmark” laid down in the Financial Services Act 2012, the review recommends that strong and successful financial services that set the highest standards are an essential part of building a resilient economy and to that end the following benchmarks should fall within the regulatory perimeter:


In an ongoing consultation (open until 23 October 2014) HM Treasury elicits the public’s views in relation to the review’s first set of recommendations, concerning which additional major financial benchmarks should be brought into the regulatory framework originally implemented for LIBOR. The review applies the following three criteria in relation to benchmarks being recommended for inclusion in the UK’s regulatory regime:

  • Criterion 1 – Benchmarks that are major FICC benchmarks.
  • Criterion 2 – Benchmarks where the main benchmark administration activities are located in UK.
  • Criterion 3 – Benchmarks that are based on transactions in financial instruments which are not covered comprehensively by existing market abuse regulation.

The first two consultation questions relate to the criteria mentioned above:

  • Question 1: Are the criteria the appropriate ones to use?
  • Question 2: Are there other criteria that should also be included?

The next three questions relate specifically to the seven FICC benchmarks highlighted above:

  • Question 3: Do these benchmarks meet the criteria?
  • Question 4: Are there other benchmarks that also fulfil these criteria? If so, can you provide an explanation of how and why they fulfil the criteria?
  • Question 5: Are there any specific factors to consider in the listed benchmarks that need to be taken into consideration when bringing them within the scope of regulation?

Impact Assessment

Analysing the potential costs and benefits of bringing the recommended benchmarks within the regulatory perimeter has not been delegated to the review and the government will publish an impact assessment before laying legislation before Parliament to implement the policy changes. Logically, such analysis will not only be informed by regulators and market participants’ input, but will also be based on the learning as regards costs and benefits of bringing LIBOR into the regulatory perimeter. Costs are therefore expected to arise in relation to:

  • Regulators: Authorisation and Ongoing supervision
  • Administrators: Systems and controls; Oversight Committee; Approval (controlled functions); Capital requirements; and Authorisation
  • Submitters: IT Systems; Staff; External audits; and Controlled functions application

HM Treasury emphasises that many firms – which would fall into the regulatory perimeter as submitters to the new benchmarks – will incur only incremental costs because they are already captured as submitters to LIBOR. By bringing the new benchmarks into the scope of the regulatory regime, as demonstrated by the inclusion of LIBOR within the domestic regulatory perimeter, HM Treasury expects the following benefits:

  1. Improved resilience against attempted manipulation
  2. Reduced risk of misconduct and associated fines and/or litigation risk
  3. Increased governance and regulatory oversight
  4. Decreased likelihood of cessation of these key benchmarks
  5. Increased credibility and integrity of the benchmarks
  6. Greater confidence in financial markets

Accordingly, HM Treasury asks the following three questions which arise in relation to costs, benefits and quantification:

  • Question 6: Do you agree that these are the areas where costs will arise?
  • Question 7: Do you agree that these are major expected benefits?
  • Question 8: How can costs and benefits best be quantified?

Draft Legislation

Draft legislation in the form of a statutory instrument (the draft order), at present known merely as the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. X) Order 2014, aims at bringing the new seven benchmarks within the scope of the UK’s regulatory perimeter. The draft order, under article 4, amends the Regulated Activities Order so as to specify new benchmarks (and, in turn, to make providing information in relation to these benchmarks and administering them “regulated activities”). Article 5 of the draft order disapplies transitional and interim provisions in respect of persons who already have Part 4A permission under FSMA (as inserted by section 11 of the Financial Services Act 2012) in respect of a specified benchmark. Moreover, article 6 provides for Part 4A permission to be deemed to be extended to those persons who immediately before commencement of the draft order were already carrying on the activity of providing information to the administrator of a specified benchmark and who already had Part 4A permission.

Article 7 provides for an interim permission to be granted to persons wishing to undertake administering, analysing or determining activities. This permission is granted automatically to those already undertaking these activities on commencement of the draft order. An interim permission lapses on a notice of a cancellation of permission given by the FCA after an application for Part 4A permission to carry on these activities has been granted or varied or, if earlier, on either cancellation of permission under section 55H of FSMA or the exercise by the FCA of its power to cancel permission under section 55J of FSMA.

Article 8 of the draft order enables the FCA to modify, amongst other things, its rules in their application to persons with interim permission and article 9 sets out the application of FSMA to persons with interim permission. The draft order also specifies relevant benchmarks for the purposes Part 7 (Offences in relation to financial services) of the Financial Services Act 2012.

Furthermore, amending the Financial Services Act 2012 (Misleading Statements and Impressions) Order 2013, by including the above benchmarks to the list in addition to LIBOR, article 11 specifies those benchmarks which are “specified benchmarks” for legal purposes.



3 responses

1 11 2014
FEMR Consultation: How Fair and Effective are the FICC Markets? | Global Corporate Law

[…] which, as exposed by recent events, have been susceptible to abuse and cheating: see earlier post here. Headed by Nemat (Minouche) Shafik, the Bank of England’s Deputy Governor for Markets and […]

15 04 2015
Changing Banking for Good: What is the Cure for Misconduct? | Global Corporate Law

[…] are due to enter into the regulatory perimeter to widen the net of criminal liability (see here). The Financial Conduct Authority (FCA) and HM Treasury are eager to expand safeguards to have a […]

19 08 2015
Tom Hayes: Trial By Fire | Global Corporate Law

[…] benchmarks entered into the regulatory perimeter to widen the net of criminal liability (see here, the benchmarks are WM/Reuters 4pm London Fix, Sterling Overnight Index Average (SONIA), Repurchase […]

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