BlackRock Inc., the world’s largest asset manager, warned against over-regulation of market indexes in the wake of the London interbank offered rate-rigging scandal.
Most indexes are based on transaction data and would be burdened by extra costs if they are subject to regulation, BlackRock managing directors Richard Prager and Stephen Fisher said in a response to proposals from the International Organization of Securities Commissions to reform global benchmarks.
“BlackRock remains particularly cautious about a far-reaching regulatory regime for market indices since this would likely result in significant additional cost for index providers,” Prager and Fisher said in a letter dated May 16 and released yesterday by Iosco. “The cost would ultimately be passed onto the end investor, undermining the core benefits of low-cost passive funds, whilst presenting barriers to entry for new market participants.”
Global regulators are working on alternatives to Libor after U.S. and U.K. officials uncovered attempts by banks to manipulate the benchmark rate. Royal Bank of Scotland Group Plc, UBS AG and Barclays Plc have been fined a total of about $2.5 billion and at least a dozen firms remain under investigation.
Iosco received more than 40 responses to the consultation, which was led by U.S. Commodity Futures Trading Commission Chairman Gary Gensler and U.K. Financial Conduct Authority Chief Executive Officer Martin Wheatley. Madrid-based Iosco, which brings together markets regulators for more than 100 nations to coordinate their rule-making, will publish final standards later this year.
Barclays and Standard Chartered Plc, two of Britain’s biggest banks, called on Iosco to modify or drop rules they said would prevent traders from submitting data to benchmarks.
IOSCO’s proposal “would include many types of reference price-setting process which are submission-based and where the relevant staff who are most qualified to make a meaningful submission, will necessarily be the same staff who are trading instruments which may price with reference to that benchmark,” Standard Chartered said in its response, citing the example of spot currency rates.
Barclays, which was fined 290 million pounds ($445 million) almost a year ago for rigging Libor, also said external audits of benchmarks shouldn’t be published publicly, but only released to a “stakeholder” or regulator on request.
CME Group Inc., the world’s largest futures exchange, said regulators should scale back the range of benchmarks covered by the plans, warning that a “vague and over-ambitious scope will pose challenges to any market participant or regulatory agency seeking to put the final principles into practice.”
Benchmarks underpinning equity markets and other exchange-traded products should be excluded from the rules because they are already properly regulated, CME said.
Other interbank lending rates, as well as benchmarks used in the $379 trillion swaps market, have also come in for scrutiny.
The U.S. CFTC is probing suspected rigging of the ISDAFix rate used as reference for derivatives trades. European Union antitrust regulators visited BP Plc, Royal Dutch Shell Plc and Platts last month as part of a probe into manipulation of the published prices of oil and biofuel products.
U.K. regulatory oversight of Libor was handed to Wheatley’s FCA about six months after he proposed wide-ranging changes to the benchmark interest rate in September. The Wheatley Review recommended scrapping more than 100 Libor rates tied to currencies and maturities where there isn’t enough trading data to set them properly.
Iosco responded to the interbank-rate scandal last year by announcing the task force, which is reviewing benchmarks across different financial sectors. The Iosco proposals extend to dozens more rates than the Libor-style interest benchmarks that the Wheatley report was limited to.
BlackRock said it is important that regulators differentiate between rate benchmarks, like Libor and Euribor, that are based on estimates, and market indexes based on financial data.
“Such a distinction is additionally appropriate since providers of market indices are commercially incentivized to ensure that their index tracks the relevant market as closely as possible,” the New York-based firm said.
ING Groep NV, the largest Dutch financial company, in contrast welcomed tougher rules around rate setting. “A benchmark should be based on actual trade data to avoid subjectivity,” ING said in its submission.
“Governance for contributing banks needs to include robust processes and effective controls specifying concrete parameters to contribute rates,” the Amsterdam-based bank said.
Examples of specific benchmarks other than interbank lending rates include ISDAFix, and the Overnight Index Swap, both used in the derivatives markets.