UK Regulators Struggle to Cure Benchmarks

Attempts by the world’s regulators to fortify the methodologies and in some cases change the providers of benchmarks have hit hurdles and timelines have been extended. For example, the debate about how to safeguard Libor against manipulation continues years after the problems were first discovered. Such concerns about benchmark manipulation by some traders has drawn global regulatory scrutiny, most recently in the foreign-exchange market, where the scandal led to total fines of $4.3 billion for six banks.

The U.K. Treasury, the Bank of England and the U.K.’s Financial Conduct Authority plan to publish preliminary findings on strengthened rules for benchmarks before the end of this year. That report is expected to recommend that the FCA be given powers to regulate a number of benchmarks, including those for the foreign-exchange, gold, silver, crude-oil and swap-rates markets.

Certainly benchmark providers, administrators and users are all grappling with regulatory changes which are cannot be completed overnight. The main benchmark for currency, the WMR fix, is the rate calculated daily at 4pm in London by WM/Reuters. WM/Reuters have proposed several changes to the benchmark, but banks and investors have been slow to adapt to the new methodology, and implementation has now been delayed until February 2015, at the earliest.

Cognizant of unwanted regulatory scrutiny, the main precious metals markets have moved much faster to push through changes, but results have been mixed. Independent, electronic platforms are taking over responsibility for setting daily prices from the small cliques of banks that used to meet behind closed doors. The silver, platinum and palladium markets have all gone electronic in the past few months, and the gold market is set to move in early 2015.

But already there has been criticism of the new LBMA Silver Price, the first metals benchmarks to go electronic in August. Some market participants believe the price isn’t quite reflecting market trades.

The LBMA’s chief executive, Ruth Crowell, said she wasn’t aware of any issues with the silver fix, and that the group has sought to learn from the silver fix as it works on the new gold fix. “It’s understandable that there would be teething problems,” she said. A spokesman for Thomson Reuters, which operates the new silver platform with CME Group Inc., said it continues to “monitor industry feedback” and that the new benchmark “has been well received as a significant improvement.” CME said it was continually improving upon the platform, but that the fix has worked “flawlessly” establishing a price and that it hadn’t received any complaints.

At a time when there is already diminished public trust in financial service providers, politicians and regulators have been keen to take an aggressive stance in holding the index industry to account. With an election looming in 2015, The UK Chancellor George Osborne is eager to be seen taking firm action, especially given the recent focus on scandals involving the $5.3tn foreign exchange market. “I am going to deal with abuses, tackle the unacceptable behaviour of the few, and ensure that markets are fair for the many who depend on them.”

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