RIMES hosted a regulatory seminar on June 9th: EU Benchmarks Regulation, Preparing for the Buy-Side Challenges. Experts from market participants and advisory firms presented to an audience of compliance managers on key elements of the legislation. Over the course of this five blog series, RIMES reports back on the main discussion points raised during these informative presentations.
In the final presentation of RIMES’ London regulatory event, Stephen Farrell, Director, Banking & Capital Markets at Deloitte, gave his thoughts on financial benchmarks assurance.
Stephen started by explaining why benchmarks assurance is important. First, it is already a regulatory requirement. Specifically, under the Market Abuse Regulation there is a requirement for submitters of Libor to undertake an annual compliance assurance report. Second, assurance is increasingly recognized by benchmark users as a means of instilling client confidence in their funds. As Stephen pointed out, benchmark assurance is also a good way for firms to create market differentiation and control remediation.
Stephen defined assurance as an independent opinion on the sufficiency of the design and operational effectiveness of a firm’s underlying control framework. Importantly there are a number of types of assurance that can be used by benchmarks users. The range of assurance extends from more informal ‘review and recommend’ procedures, often used in the earlier stages of process remediation, through to limited assurance and reasonable assurance.
When it comes to benchmarks, assurance cannot cover the entire scope of transaction data due to the sheer volume of this data. However, benchmark assurance can be used to provide external oversight of governance, data extraction, data assessment, methodology and publication processes. This information can be used to provide financial benchmark stakeholders with a guarantee that their benchmark processes produce fit-for-purpose results.
In this regard, Stephen made the important point that many firms may be unaware of where their procedures stand in relation to the EU Benchmarks Regulation. For such firms, assurance has a clear role to play in helping ensure their processes and systems are ready for the new Regulation.
Stephen finished by sharing insights from his work in benchmark assurance. First, Stephen talked about the importance of understanding the value of assurance for users of a report; specifically, why they are seeking assurance and what needs to be assured. Stephen made the point that assurance will be particularly important for benchmark administrators in third countries looking to ensure equivalency with the Regulation.
Second, Stephen suggested that working with assurance providers from an early stage can be beneficial, as it allows management to understand up front what they need to provide in terms of the documentation of the control environment. It can also enable firms to quickly fix any issues as they emerge so that they can be resolved ahead of publication of the final assurance report.
Third, documentation is essential. This includes being able to articulate a submission process end-to-end; including key changes in the environment throughout the period. Transparency across the whole submission process is important, and firms should remember that regulators will expect controls to codify existing practices within organizations.
Stephen stressed that providing clear evidence for how the control environment changed throughout a reporting period is also very important, along with the need to record and store information relating to the performance of controls for the assurance provider.
From RIMES’ perspective, the service assurance challenge facing buy-side firms is significant. As the EU Benchmarks Regulation pushes for increased transparency around benchmarks, firms will need to ensure they have a robust control environment in place. Managed data services providers such as RIMES can help benchmark users ensure compliance, while lowering the costs associated with the use of benchmarks.
For further information, please contact RIMES.
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