Last Updated: 18 January 2023
Global securities regulator, the International Organization of Securities Commissions (IOSCO), has published its Principles for Financial Benchmarks today. Intended to act as guidelines for benchmarks used in financial markets, it gives benchmark providers 18 months to comply.
The paper, which looks similar to the second consultation paper put out in April, includes changes to text on oil benchmarks and whether benchmarks calculated solely on transactions should be mandatory.
The Data Sufficiency Principle, which says that “a benchmark should be based on prices, rates, indices or values that have been formed by the competitive forces of supply and demand and anchored by observable transactions entered into at arm’s length between buyers and sellers in such an active market…” will not be obligatory. The report said: “This does not mean that individual benchmark determinations must be constructed solely or even predominantly by transactions.”
However, an annex has been introduced to the report discussing to what extent and on what basis expert judgment was used, if any, in each benchmark determination.
The report also says that oil price reporting agencies (PRAs), who have argued against any rules governing oil benchmarks, should “continue to implement and comply with the PRA principles.”
The IOSCO task force, which conducted investigations leading to the paper, was set up in September last year in the wake of the Libor scandal. It is headed up by Martin Wheatley, the Chief Executive of the UK Financial Conduct Authority, and Gary Gensler, the Chairman of the US Commodity Futures Trading Commission.
Gensler said: “Given the known problems with LIBOR, EURIBOR and other significant market benchmarks, I am pleased that the IOSCO Principles issued today require that benchmarks be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest.”
Wheatley added: “Benchmarks are a useful and important tool in many financial markets. These principles set out clear and robust standards that will improve their construction and oversight of benchmarks, and form an important step in restoring their credibility.”
According to its website, IOSCO regulates more than 95 percent of the world’s securities markets, and its members include more than 120 securities regulators and 80 other securities markets participants (i.e. stock exchanges, financial regional and international organizations etc.).
This year has seen a high level of activity from IOSCO in the indexing and exchange-traded fund space. Last month it launched its Principles for the Regulation of ETFs, which drew criticism from Edhec-Risk saying that there was not enough focus on index transparency.