On the 25th of September, HM Treasury launched a consultation on extending the new legislation the government put in place to regulate LIBOR to cover further benchmarks in the foreign exchange, fixed income and commodity markets.
The UK government is charging ahead with its benchmark reforms and intends to have the new regime for the designated benchmarks in place by the end of the year. It will also continue to engage in ongoing international discussions on improving the integrity of all benchmarks.
The consultation follows the establishment of the ‘Fair and effective markets review’ (the Review) in June this year which will run for 12 months and look into the way the UK wholesale financial markets operate. The Review is expected to make recommendations on:
- principles to govern the operation of fair and effective markets, focusing on fixed income, currency and commodities;
- reforms to ensure standards of behaviour are in accordance with those principles; • tools to strengthen the oversight of market conduct;
- whether the regulatory perimeter for wholesale financial markets should be extended, and to what extent international action is required;
- additional reforms in relation to benchmarks, in order to strengthen market infrastructure.
HM Treasury has now published a consultation document which seeks views on the first set of recommendations from the Review, concerning which additional major financial benchmarks should be brought into the regulatory framework originally implemented for LIBOR.
“The integrity of the City matters to the economy of Britain. Ensuring that the key rates that underpin financial markets are robust, and that anyone who seeks to manipulate them is subject to the full force of the law is vital.” said Andrea Leadsom, economic secretary to the Treasury, in a statement, continuing: “That’s why the government is determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them.”
Under the proposals in the consultation, the government suggests extending the legislation to the following major benchmarks:
- Sterling Overnight Index Average (SONIA) and the Repurchase Overnight Index Average (RONIA), which both serve as reference rates for overnight index swaps
- WM/Reuters 4pm London Fix, which is the dominant global foreign exchange benchmark (WMR)
- ISDAFix, which is the principal global benchmark for swap rates and spreads for interest rate swap transactions
- London Gold Fixing and the LMBA Silver Price, which determine the price of gold and silver in the London market
- ICE Brent futures contract, traded on the ICE Futures Europe (IFEU) exchange, which acts as the crude oil futures market’s principal financial benchmark.
The consultation asks if the above benchmarks meet the Review’s criteria and whether there are other benchmarks that should also be listed. In order to identify the major benchmarks in the fixed income, currency and commodity (FICC) markets, the Review has identified the following criteria which benchmarks must meet in order to be recommended for inclusion in the UK regime:
- Benchmarks that are major FICC benchmarks. The Review defines ‘major benchmarks’ as those that have the greatest usage within the main FICC product markets. It is these benchmarks that would have the biggest impact on retail and wholesale investors if they were distorted or abused, and would represent the greatest source of systemic vulnerability and risk if their integrity were questioned;
- Benchmarks where the main benchmark administration activities are located in the UK. The Review’s recommendations only cover UK-based benchmarks due to the appropriateness and limits of legislative reach;
- Benchmarks that are based on transactions in financial instruments which are not covered comprehensively by existing market abuse regulation.
In its consultation document HM Treasury asks if the above criteria are appropriate and whether other criteria should also be included.
The deadline for comments on the consultation document is 23 October 2014. The new regime, which is subject to the consultation, would come into force by the end of this year, significantly in advance of EU proposals which are currently in draft discussions between the EU Commission and the Council of the European Union.
The HM Treasury consultation is available here.
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