IOSCO has published its Report on principles for financial benchmarks. The Report establishes guidelines in the following areas:

• Governance
• Benchmark quality
• Quality of methodology
• Accountability mechanisms

IOSCO recommends that the application and implementation of the guidelines should be proportional to the size and risks of each benchmark and/or the administrator and the benchmark-setting process.

The IOSCO task force, which conducted investigations leading to the publication of the Report, was set up in September 2012 in the wake of the Libor scandal. IOSCO’s stated objective in formulating the guidelines was to create an overarching framework of principles for benchmarks used in financial markets. Specifically, IOSCO sought to articulate policy guidance and principles for benchmark-related activities that will address conflicts of interest in the benchmark setting process, transparency and openness to consider issues related to transition.

One of the foremost areas of controversy arising from the Libor and Euribor scandals was the extent to which benchmarks should be based on actual transactions. The Report concludes 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…”. The Report then states: “This does not mean that individual benchmark determinations must be constructed solely or even predominantly by transactions.”

Next Steps
The Report recommends that IOSCO members should consider whether regulatory action may be appropriate to encourage implementation of the guidelines set out in the Report. This would suggest an expectation on the part of IOSCO that the guidelines will, through regulation at national or supranational level, become binding on benchmark providers.

The Report also states that IOSCO intends to review within an 18-month period the extent to which the guidelines formulated by it have been implemented by obtaining the input of stakeholders, competent regulatory authorities and, as appropriate, benchmark administrators.

Contributed by Niall Crowley