The FCA Evaluates the Impact of its Benchmark Reforms

At the end of October, the UK’s Financial Conduct Authority (FCA) published an evaluation paper which examined the reforms it made to the country’s benchmarks regime back in 2015.

That year, the FCA introduced seven benchmarks into its regulatory and supervisory regime: SONIA, RONIA, the ICE Swap Rate, the WM/R London 4pm Closing Spot Rate, the LBMA Gold Price, LBMA Silver Price and the ICE Brent Index. Its intention was to restore market confidence in these benchmarks following the highly-publicized cases of financial misconduct and rate rigging that took place a few years previously.

Through the Benchmarks Instrument 2015, the FCA looked to improve the robustness of these seven key benchmarks and restore market confidence by mandating their administrators to become regulated entities, implement governance and oversight measures, improve record keeping and monitoring, and set aside sufficient financial resources.

Overall, the FCA determined that these measures have had a positive impact on the robustness of benchmarks, and this has given benchmarks users greater confidence. However, the impact on the market is less clear cut. According to the FCA, while the intervention proved beneficial for markets that were already liquid, less liquid markets saw a further decrease in liquidity. This is likely due to the perception that the fines, methodology changes and regulatory shifts caused by the intervention increased risk.

These lessons are important as they indicate what may happen as a result of the EU Benchmarks Regulation (BMR): a new regulatory regime currently falling into place in Europe. The measures imposed by BMR go far beyond the FCA’s 2015 interventions and the corresponding consequences of the Regulation will likely be exponentially more pronounced.

First, there will be the trade offs that the FCA rightly points out come with policy changes. BMR will no doubt make the benchmarks landscape more robust, but it will also likely make it much harder for benchmark administrators and users to go about their business. Second, there’s the danger that the far more stringent compliance regime, which includes highly punitive fines, will increase the importance of risk management to firms, likely impacting liquidity in a similar way to the FCA’s 2015 reforms.

While much uncertainty remains around the impact BMR will have on financial markets, it is now clear that there will be as many challenges as benefits. On the plus side, benchmarks will be much more robust and will provide a firmer underpinning to financial markets. On the negative side, benchmark users will need to do much more to ensure they are getting the right benchmarks data, accurately, and in a timely fashion – while also ensuring compliance with the BMR regime.

These are not insurmountable challenges, however. Firms that embrace an agile approach to benchmarks data management and compliance will be able to quickly adapt to changes in the market, reduce risk and operate with confidence. What is important is that firms act now, because time is running out to get an appropriate system in place.


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