There is little doubt that indices and benchmarks contribute to making financial markets more efficient and liquid. These benefits have been acknowledged by market participants and various regulatory authorities, who have approached index providers over the years to create indices enhance the transparency, liquidity, and tradeability of their local markets.
However, last year’s Libor-related revelations have placed the “-ibor” benchmarks in the spotlight and prompted regulators and the marketplace to reexamine benchmarks and indices. A range of regulatory authorities are now investigating the underlying facts of any manipulation of Libor or other benchmarks to identify and address the failings of existing mechanisms. Several consultation papers have been put forward, discussing proposals to regulate indices and benchmarks, while industry associations have also developed codes of conduct. The various initiatives are summarised below:
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Stakeholders In The Debate
The roundtables that were organised by EBA/ESMA and IOSCO in February, following the publication of their respective consultation papers, demonstrated that the stakeholders in the benchmark debate are a diversified group, ranging from index providers and fund managers to banks and a variety of industry associations.
Among the stakeholders, the Oil Price Reporting Agencies (PRAs) might have been well prepared for the current discussions, as it was only in May 2012 that IOSCO published its final report on Principles for Oil Price Reporting Agencies (PRAs).1 Regulatory authorities had been discussing measures to enhance the reliability of the oil price assessments that are often referenced in derivative contracts, potentially making them subject to regulation following the publication of a joint report with the IEF, the IEA and OPEC in October 2011. IOSCO’s principles detailed recommended practices for PRAs, aimed at promoting the quality and integrity of oil price assessments to enhance the reliability of the oil derivative contracts referencing the assessments. However, IOSCO ultimately decided against making any more specific recommendations in its final report as, at the time, the much broader review of benchmark regulation had already begun.
Many stakeholders are concerned that, with a multitude of products potentially being classified as “benchmarks,” any regulatory approach should enable a timely implementation for the most relevant benchmarks while avoiding unintended consequences for the broader market. To achieve these goals, regulators would need to distinguish clearly between the various product categories, most notably between benchmarks and indices, as well as between Libor-type products and others, given the significant differences that exist between them.