The United Kingdom is to enforce a new benchmark regime before the year is out, according to plans revealed by the UK Chancellor George Osborne in his annual Mansion House speech last Thursday. HM Treasury, the Bank of England and the Financial Conduct Authority will also conduct a comprehensive review of standards in fixed income, currency and commodity markets. Additionally, the UK Government will be introducing new domestic criminal offences for market abuse rather than opting into the new EU Directive on criminal sanctions for insider dealing and market manipulation.
“People should know that when they trade in London, whether in commodities or currencies or fixed income instruments, that they are trading in markets that are fair and effective.” Mr Osborne said, and added that: “London is home to 40% of the global foreign exchange business; 45% of over-the-counter derivatives trading; and 70% of trading in international bonds. And I intend to keep it that way.”
The UK Government will extend the new powers that have been put in place to regulate the London inter-bank offered rate (LIBOR) to cover further major benchmarks across foreign exchange, commodity and fixed income markets, the Chancellor explained, “many of which are currently entirely unregulated”. HM Treasury will consult on a full list of benchmarks to be covered by this coming autumn, and optimistically, the new regime will be in place by the end of the year.
Financial Indices and benchmarks play a crucial role in the efficient working of financial markets and the smooth operation of the wider economy. It is perhaps surprising that, until recently, index data and benchmarks have been largely unregulated and unsupervised by regulators.
The repeated manipulation of various interbank interest rate benchmarks called into question the self-regulatory nature of the setting of benchmarks and served as the catalyst that propelled benchmarks into the regulatory spotlight. The recent EU settlement fines bring the financial sector’s penalties for benchmark manipulation to over $6bn, and this is expected to rise as regulators continue investigations and private lawsuits multiply.
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, Mr 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.” He concluded.