Fixed income, commodity and currency benchmarks to be regulated from April, UK confirms

Out-Law News | 23 Dec 2014 | 2:22 pm | 2 min. read

Seven financial benchmarks used as reference rates in foreign exchange, commodities and swaps transactions will be regulated by the Financial Conduct Authority (FCA) from 1 April 2015, the UK regulator has announced.

It is now consulting on the detail of its proposed new rules, which build on those introduced to govern the London Interbank Offered Rate (LIBOR) benchmark in 2013. The UK Treasury has also announced that the new criminal offence of making false or misleading statements in relation to LIBOR will be extended to cover the additional benchmarks from the same date.

"The FCA has announced its early Christmas gift of ever-increasing regulation of the UK's benchmarks following its actions in relation to LIBOR and FX [foreign exchange]," said financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com.

"These 'magnificent seven' benchmarks and those firms involved with them should take heed and learn the lessons from those related to LIBOR and FX who have received significant financial penalties for misconduct prior to their regulation by the FCA," he said.

The UK announcements come ahead of the expected introduction of EU-level benchmark regulation, following the publication of proposed legislation by the European Commission in 2013. The FCA said that it expected that this legislation would "eventually replace the UK regulatory framework" once fully in force; although there is currently no timescale in place for when this is expected to happen.

The FCA has proposed new authorisation requirements both for the administrators of affected benchmarks and for the firms that contribute data or information to them. A senior individual within each relevant firm would be appointed to oversee compliance with the FCA's requirements including the implementation of robust governance and oversight arrangements, the identification of potentially manipulative behaviour and the controlling of conflicts of interest.

At the same time, the criminal offence of manipulating a 'relevant benchmark' as originally introduced for LIBOR will be extended to apply to any person manipulating any of the seven new benchmarks. Those found guilty of an offence could be jailed for up to seven years and face unlimited fines. The government has made the necessary legislative changes, while the FCA consultation closes on 30 January 2015 with final rules expected shortly afterwards.

Rates that will be covered by the new rules include the Sterling Overnight Index Average (SONIA) and Repurchase Overnight Index Average (RONIA), which are reference rates used for overnight index swaps; dominant global foreign exchange benchmark WM/Reuters 4pm London Fix; and ISDAFix, the principal global benchmark for swap rates. The new regime will also cover the London Gold Fixing and LBMA Silver price rates and the ICE Brent Index, which acts as the crude oil futures market's principal financial benchmark.

The announcements implement an early recommendation of the Fair and Effective Markets Review, which was set up by the government in June. This is a joint review by the Treasury, Bank of England and the FCA into the way that wholesale financial markets operate, with a particular focus on areas in which recent allegations of the most serious misconduct have arisen. It is due to publish its final report in June 2015.

Commenting on the announcements, chancellor George Osborne said that the changes would "deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them".

"The integrity of the City matters to the economy of Britain," he said. "Ensuring that the key rates that underpin financial markets here and around the world are robust, and that anyone who seeks to manipulate them is subject to the full force of the law, is an important part of our long term economic plan."