The policy statement called ‘The regulation and supervision of benchmarks’, was prepared by the FSA for the purpose of outlining a framework for the specified regulations and supervision benchmark activities, primarily LIBOR, following recommendations provided in the Wheatley Review.
What is LIBOR?
LIBOR is an interest rate at which banks can borrow funds from other banks. The rate is calculated every morning by Thomson Reuters based on interest rates provided by the British Bankers’ Association
Banks are required to submit the actual interest rates they are paying, or would anticipate paying, for borrowing from other banks. However, these figures could be manipulated to demonstrate a healthier picture of the bank’s credit quality and its ability to raise funds, an issue brought into the public spotlight by the investigations of financial institutions into the fixing of LIBOR rates. In order to prevent this, the Government ordered a consultation on the LIBOR-setting framework.
The Wheatley Review
The Government consulted with Martin Wheatley in July 2012 in order to undertake an independent review of the LIBOR-setting framework. The report, published in September 2012, highlighted a number of issues and weaknesses in the LIBOR process and made recommendations to the Government to rectify those failings.
The Wheatley Review highlighted the absence of control procedures, weaknesses and conflicts of interest in governance frameworks, in addition to the lack of oversight by the administrator of LIBOR. As a result, the Review recommended that LIBOR activities should be subject to statutory regulation.
The FSA policy statement proposes that the administrators of LIBOR must adhere to the following guidelines:
They must enact governance measures, including an oversight committee and establish practice standards;
They must be responsible for the monitoring and surveying of benchmark submissions, in order to identify breaches of practice and/ or potentially manipulative behaviour;
They must maintain sufficient financial resources to ensure they can maintain operating costs of six months, in addition to a buffer period of three months; and
They must appoint an individual, who is FCA (Financial Conduct Authority) approved, to administer the firm’s compliance with the FCA’s requirements for benchmark administration.
The FSA have also suggested that benchmark submitters (i.e. the financial institutions who are providing information in relation to a specified benchmark) must also observe the following rules:
Benchmark submitters are to maintain effective internal governance and oversight procedures for providing information to the benchmarks they submit to;
Benchmark submitters must put in place organisational arrangements for managing conflicts of interest within their firm;
Benchmark submitters must have an effective procedure, based on objective criteria, for determining their LIBOR submissions;
Benchmark submitters must keep all relevant records for five years and appoint an external auditor on an annual basis to report to the FCA on the submitter’s compliance with the submission requirements;
Benchmark submitters must notify the FCA of any suspicions in relation to manipulation, attempts to manipulate, or potential collusion to manipulate the benchmark; and
Benchmark submitters must appoint an individual, who is FCA-approved, to oversee the firm’s compliance with the FCA’s requirements for benchmark submission.
New Rules To Restore Faith
On the new regulations, Mr. Wheatley stated:
“Confidence and trust are critical to financial markets. That trust has been eroded by the LIBOR scandal and the recent enforcement action against several banks. These new rules today should help restore that faith and bring integrity back to LIBOR.”
The above guidelines took effect on 1 April 2013 and will be the first set of regulations of its kind to be implemented surrounding the setting of LIBOR rates.