Two of Europe’s financial regulators, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), have published a series of principles for improving the calculation of key benchmark indices.
Steven Maijoor, ESMA chair.
The principles, which relate to index users, administrators, calculation agents, publishers and data submitters, address problems identified with benchmark-setting processes and are intended to instil market confidence and guarantee benchmark accuracy and integrity.
In particular, the principles are designed to ensure that incidents such as the Libor-rigging scandal, which resulted in hefty fines for RBS, Barclays and UBS, are not repeated.
While not strictly legally binding, given the severity of the Libor scandal, the two watchdogs consider it important that the principles are implemented by all market participants, with the aim of reinforcing the robustness of procedures, ensuring transparency and creating a level-playing field.
Steven Maijoor, ESMA chair, said: “The final principles now give clarity to benchmark providers and users in the European Union about what is expected of them when engaged in this critical market activity. These principles reflect the wider work being carried out on benchmarks and their immediate adoption will help restore confidence in financial benchmarks and prepare the way for future legislative change.”
Andrea Enria, EBA chair, added: “The EBA and ESMA believe that these principles represent a sound interim solution for benchmark providers and users, ensuring that these important market indices are produced in a transparent and reliable manner.”
The principles cover four themes:
Methodology: the methodologies for the calculation of a benchmark, including information on the way in which contributions are determined and corroborated, should be documented and be subject to regular scrutiny and controls to verify their reliability;
Governance structure: the process of setting a benchmark needs to be governed by clear and independent procedures, with detailed information on the process made available publicly, in order to avoid and manage conflicts of interest and limit its susceptibility to manipulation, discretionary decision making or price distortion;
Supervision and oversight: confidence in a benchmark is enhanced through regulation and oversight and an appropriate sanctioning regime that allows sanctions for improper conduct, as it will be the case in accordance with future EU legislation on market abuse; and
Transparency: a benchmark should be transparent and accessible to the public, with fair and open access to the rules governing its establishment and operation, calculation, and publication; the fact that a benchmark is (or may be) published first to certain stakeholders before it is to others should be disclosed.
While the principles have broadly been accepted by industry participants, they have not been wholeheartedly praised. Indeed, Nik Bienkowski, co-CEO of Boost ETP, a London-based exchange-traded products provider, reckons they fall short in key areas and are a “missed opportunity”.
According to Bienkowski: “The new guidelines do nothing to prevent the clear conflict of interest that can occur when a bank-issued fund tracks the bank’s own index. When the issuer is also the calculation agent, there is nothing to stop it dismissing an awkward market event as a ‘disruption’ and providing whatever price it deems ‘fair’.
“And the guidelines’ insistence that benchmarks should be compiled with ‘observable’ independent transaction data is also badly at odds with reality. Many structured products continue to use opaque indices that do not publish either the data or the index rules…These guidelines should have gone further to force greater transparency, and at least introduce greater risk warnings for products where the issuer and the index provider are one and the same.”
ESMA and the EBA will review the principles’ application after 18 months.