Benchmarks underpinning markets from oil to currencies face tougher oversight under plans by global regulators to prevent any repeat of Libor-style fraud.
Rates should be based as much as possible on real transaction data, rather than estimates, and banks should tackle conflicts of interest, the International Organization of Securities Commissions, a Madrid-based group that harmonizes global market rules, said in guidelines published today.
Authorities are grappling with a growing number of rate-setting scandals. Global regulators have fined UBS AG, Barclays Plc and Royal Bank of Scotland Group Plc about $2.5 billion for distorting the London interbank offered rate, known as Libor, and similar benchmarks.
The measures are “an important step” in restoring the credibility of tarnished benchmarks, Martin Wheatley, chief executive officer of the U.K. Financial Conduct Authority and a co-head of the Iosco benchmark task force, said in a statement. “These principles set out clear and robust standards.”
Probes into potential rigging have expanded beyond interbank lending rates to include benchmarks underpinning energy prices, currency trades and derivatives.
The U.S. Federal Energy Regulatory Commission this week ordered Barclays and four former traders to pay a combined $487.9 million in fines, as part of an investigation of alleged manipulation of energy markets.
In a separate probe, the U.S. Commodity Futures Trading Commission is reading through 1 million e-mails and instant messages from traders at the world’s largest 15 banks and broker ICAP Plc for evidence of manipulation of the ISDAfix rate.
Gary Gensler, chairman of the CFTC, co-led the Iosco task force with Wheatley.
Iosco’s recommendations show that the best way to restore confidence in benchmarks is to “greatly improve the existing arrangements, rather than adopt a whole new approach,” Richard Reid, a researcher at the University of Dundee in Scotland, said in an e-mail.
Because benchmarks can’t always be based on real transaction data, “the success of the proposals will depend upon the transparency and accountability mechanisms which are set in place and the vigor and effectiveness with which these are policed,” Reid said.
Organizations that administrate benchmarks will be required by regulators to “publicly disclose their compliance” with the guidelines within 12 months, Iosco said. The group will carry out a review in 18 months to see how well the measures have been enforced.
The Iosco standards require that benchmarks “be anchored by observable transactions and subject to robust governance processes,” Gensler said in the Iosco statement published on the group’s website.
Under the Iosco guidelines, firms involved in benchmark-setting will have to increase oversight of their employees who set the rates, and sign up to a code of conduct.
Organizations in charge of administrating rates should be responsible for verifying the accuracy of the data they receive from banks and other market participants, and ensuring it is based on data from actual trades as much as possible, Iosco said.
U.K. authorities said this month that responsibility for administrating Libor will be transferred from the British Bankers’ Association, an industry group, to NYSE Euronext, in a bid to restore credibility of the rate, which is tied to $300 trillion in securities.
Iosco, which brings together markets and securities regulators from over 100 countries, said that its guidelines should be applied to a broad range of benchmarks, ranging from interbank rates to benchmarks underlying energy, equity and commodities markets. Exceptions include benchmarks established by public authorities, such as consumer price indexes, and reference prices set by clearinghouses.
The organization also said that the standards should be seen as supplementary to recommendations it published last year that target oil price reporting agencies.
Royal Dutch Shell Plc, BP Plc, Statoil ASA and Platts, the oil-price data collector owned by McGraw Hill Financial Inc., are being investigated by the European Commission on price fixing concerns. Platts publishes the Dated Brent benchmark that helps determine the price of more than half the world’s oil.
“The price-reporting agencies principles were developed with due regard to the specifics of the oil market,” whereas today’s guidelines are more general, Iosco said. “While both sets of principles reflect similar high-level concerns, they differ in specifics.”
Iosco said that it would weigh the need to more closely align the two sets of guidelines, in collaboration with the International Energy Agency, International Energy Forum and the Organization of Petroleum Exporting Countries.
“Platts supports initiatives by legislators and regulators to assure confidence in price benchmarks in the oil markets and other physical commodities markets that we cover” Larry Neal, Platts president, said in an e-mailed statement.
Auditors are already conducting independent reviews of Platts and competitors Argus and ICIS, the companies said May 22. They’ll scrutinize compliance with methodologies for publishing benchmark prices for crude, refined products and other commodities.
Platts is “well on track” to have an external review into its oil price assessments finished by October, the company said in a statement today. “We are confident that the review will demonstrate that our price assessment processes are underpinned by very robust governance and control systems,” it said.
Benchmarks should be “anchored in observable transactions entered into at arm’s length between buyers and sellers,” according to today’s Iosco guidelines. Still, this doesn’t mean that “every individual benchmark determination must be constructed solely from transaction data.”
Regulators have clashed over the speed at which tarnished benchmarks should be replaced, and over how hard and how fast authorities should push the abandoning of rates based on estimates rather than real transactions.
While Gensler has said benchmarks such as Libor that are based on banks’ estimates should be replaced with alternatives using real transaction data as soon as possible, other authorities, including Wheatley, have argued in favor of a more incremental approach.
The Iosco standards are one of several steps being taken by international regulators to restore confidence in benchmarks.
Financial Stability Board Chairman Mark Carney, the governor of the Bank of England, said last month that global regulators will set up a task force with banks in a bid to repair or replace tarnished benchmarks in the wake of the rate-rigging scandals.