From 1 April 2015, the FCA is to regulate the way in which seven key fixed income, currency and commodity benchmarks are set within the UK. Through the on-going Fair and Effective Markets Review conducted by HM Treasury, the Bank of England and the FCA, the following benchmarks have been deemed to be of such importance, that they should be brought within the scope of the FCA’s regulatory regime:
- Sterling Overnight Index Average (SONIA)
- Repurchase Overnight Index Average (RONIA)
- WM/Reuters (WMR) 4pm London Closing Spot Rate
- London Gold Fixing Benchmark
- LMBA Silver Price
- Ice Brent
Currently, the only benchmark regulated by the FCA is LIBOR. The FCA is now consulting on how requirements for LIBOR should be amended in order to take into account the ways in which the above seven benchmarks are set. Its consultation ends on 30 January 2015.
What are the FCA’s requirements for benchmark submitters and benchmark administrators?
The FCA’s regulatory requirements in relation to benchmark submission and benchmark administration are set out in the FCA’s General guidance on Benchmark Submission and Administration, referred to as BENCH. This Guidance references the parts of the FCA’s Handbook which apply to benchmark submitters and administrators.
The FCA’s main requirements for benchmark submitters and benchmark administrators are contained in Chapter 8 of the Market Conduct sourcebook (“MAR”). Currently, benchmark administrators are required to:
- Establish organisational and governance arrangements so they can effectively monitor benchmarks
- Identify conflicts of interest
- Monitor benchmarks to identify manipulation, or attempted manipulation
- Notify the FCA where there is collusion to manipulate or attempt to manipulate a benchmark
Benchmark submitters are required to:
- Establish and maintain organisational and governance arrangements
- Have in place a benchmark submission methodology
- Identify and manage conflicts of interest
- Notify the FCA of suspicions that there is collusion to manipulate a specified benchmark
- Produce an auditor’s report to the FCA on compliance with the FCA’s requirements on a regular basis
In order to take into account the requirements of the above seven benchmarks, the FCA is proposing to amend its existing requirements for benchmark administrators set out in Chapter 8 of MAR. This is because some of the benchmarks prices (WMR, Ice Brent and the LMBA Silver Price) are not set through submissions made by panel submitters. Instead, they are priced through transactions on exchange or from media sources. The FCA is proposing that administrators of these benchmarks should be required to assess the underlying quality of the data they are using in order to set their prices.
With regard to benchmark submitters, as set out in the FCA’s Perimeter Guidance Manual, the FCA’s requirements in Chapter 8 of MAR are currently intended to apply to members of a benchmark submission panel, as opposed to anyone involved in entering into transactions or supplying data which may be used in the context of the setting of a benchmark price. Given the FCA is proposing that the Chapter 8 MAR requirements will not apply to benchmarks which do not have panel contributors (namely, WMR, Ice Brent and the LMBA Silver Price), individuals involved in supplying data to sources (such as media outlets) which administrators use to set these benchmark prices should fall outside the scope of the regime set out in Chapter 8 of MAR. However, such individuals would still fall within the scope of the criminal regime.
What criminal offences will apply to the setting of benchmark prices?
The criminal regime which applies in relation to the making of misleading statements in connection with LIBOR, as set out in Section 91 of the Financial Services Act 2012, will also apply to the above seven benchmarks. The criminal regime includes two offences:
- The offence of intentionally making a false or misleading statement in the course of arrangements for the setting of a relevant benchmark.
- The offence of intentionally engaging in a course of conduct which creates a false or misleading impression as to the price or value of any investment, where the impression may affect the setting of a relevant benchmark.
The first offence would appear to apply in particular to individuals who knowingly or recklessly make false or misleading statements to benchmark administrators. The second offence would appear to have a broad application as it concerns the creation of a false or misleading impression. Significantly, it may apply in particular to individuals involved in the trading of the benchmarks which do not have panel contributors (WMR, ICE Brent and the LMBA Silver Price) even though those individuals would currently appear to fall outside the scope of the civil regulatory regime set out in Chapter 8 of MAR.
Traders and any individuals who provide information to entities which use data for the purpose of setting the seven benchmark prices should be mindful of the offences in the criminal regime in particular, given its reach appears to extend beyond panel contributors.