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IOSCO Reviews Implementation of Benchmarks by Interest Rate Administrators

The Board of the International Organization of Securities Commissions has published a review of the implementation of its Principles for Financial Benchmarks by administrators of the reference rate benchmarks Libor, Euribor and Tibor (collectively the IBORs).

The objective of the IOSCO review was to identify the degree to which the administrators of the IBORs have implemented these principles.

The report found all three administrators have made good progress in implementing the principles related to governance, reflecting the primary focus of the reform process to date. Furthermore, that both completed and on-going reforms have improved the overall oversight, governance, transparency and accountability of the three administrators and their respective benchmarks. This has undoubtedly improved the quality and integrity of the three benchmarks. Additionally, IOSCO notes that these reforms have occurred in the context of regulatory, operational and organisational changes concerning all three administrators.

However, the report was not all praise, it highlights that further work is still needed on the benchmarks methodology and design, and that Libor and Tibor administrators need to devote more attention to the management of conflicts of interests. In particular, IOSCO strongly encourages the three administrators to continue addressing Principle 7 which stipulates that “the data used to construct a benchmark determination should be sufficient to accurately and reliably represent the interest measured by the benchmark” as a matter of urgency. As to date, none of the administrators have provided IOSCO with all of the required data or analyses needed to demonstrate compliance with the Principle.

Martin Wheatley, the Chief Executive Officer of the UK Financial Conduct Authority and co-Chair of the IOSCO Board-Level Task Force on Financial Benchmarks, said: “This is an important contribution to the efforts to restore confidence in benchmarks. I am pleased that the recommendations by IOSCO and the FSB reflect many of the reforms to LIBOR we’ve already put in place. But a new framework is just one part of the equation – what people will want to see is evidence of good conduct.”

The report makes recommendations for each administrator on remedial actions which would strengthen the implementation of the principles. IOSCO expects each Administrator to act on these recommendations and to submit to its own regulatory authority a plan to address the remediation recommendations for all principles. Since further reform work is necessary, particularly with respect to data sufficiency, IOSCO recommends conducting a further implementation review of the three administrators in mid-2015. This additional review would seek to identify whether administrators have progressed in addressing the recommended remediation work set out in the Report.

Industry consultant Andrew Knowles commented, “The historic issues of benchmark governance and integrity represent a potentially systemic vulnerability in the wider economy, such benchmarks must command the confidence of users.” He continued, “Without official sector leadership from the FSB and IOSCO, there would likely be little action by market participants even though many users demand a superior range of reference rates”.

IOSCO is the leading international policy forum for securities regulators and is recognized as the global standard setter for securities regulation. The organization’s membership regulates more than 95% of the world’s securities markets in more than 115 jurisdictions and it continues to expand.

The full report is available here

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