Benchmarks Assurance has been saved
Establishing trust in Financial Benchmarks
Financial Benchmarks and Indices underpin transactions worth trillions of dollars across the financial services sector and beyond. Following the historical investigations into alleged manipulation of critical benchmarks – such as LIBOR and FX – the administration, contribution, and use of benchmarks and indices are now subject to significant regulatory requirements for global firms operating in the UK and Europe. Global reform of Inter Bank Offered Rates (“IBORs”) is also currently high on the agenda of regulators and firms alike.
Unsurprisingly, stakeholders ranging from financial regulators, executive management, those charged with governance, or external investors, have sought greater degrees of assurance. In particular, if all financial benchmarks are reliable and credible, regulations adhered to and the risk of manipulation reduced.
The need for such assurance has already seen considerable regulatory activity in recent years, with the increasing use of the IOSCO Principles for Financial Benchmarks and separately, Principles for Oil Price Reporting Agencies (collectively, “IOSCO”), along with continued regulatory scrutiny and oversight.
Both EU and UK Benchmark Regulation (EU and UK BMR) have led to a significant and sustained focus on benchmark assurance. Although regional in name, they have a global impact that continues to drive higher standards of regulatory oversight on the administration, contribution and use of financial benchmarks. In addition, with the reform of IBORs, such as LIBOR, well under way, the focus on financial benchmarks, and assurances that market participants can have on their continued use, will continue to grow.
The scope of global benchmark regulation covers requirements for companies who create and manage indices and financial benchmarks (administrators); companies who actively contribute data to benchmark administrators (contributors); and companies who use them in financial contracts (users). Understanding the scope of benchmark regulation and its application to a company is a critical first step in establishing confidence in ongoing compliance.
Governance and Control Assurance
Core to the compliance of benchmark regulation is reviewing and enhancing a company’s governance and control frameworks. Any review requires increased transparency and a focus on identifying and mitigating conflicts of interest – either actual or perceived. Any assurance on remedial work required to review, design, and introduce enhanced governance and oversight under a documented and embedded control framework, should not be underestimated.
Ongoing Assurance requirements
As well as impacting existing benchmark regulation and guidance, benchmark regulation includes various specific assurance requirements that companies could be affected by and must consider as part of their implementation plans. These include, but are not limited to:
EU BMR Requirements
- Critical benchmarks now require annual external assurance (typically undertaken under ISAE 3000)
- Certain commodity benchmarks now require annual external assurance
- Interest rate benchmarks now require external assurance every two years starting after six months from the issue of the code of conduct
- Third-country administrators under recognition need either external assurance or competent authority certification on their compliance of IOSCO principles (where required)
- Administrators require reviews of contributors’ adherence to the code of conduct
- Benchmark methodologies and input data require internal reviews.
IOSCO Principle Requirements
Critically, IOSCO requires the appointment of an independent internal or external auditor with appropriate experience and capability to periodically review and report on the Administrator’s adherence to its stated criteria and the requirements of the Principles.
Regardless of the stage of your consideration of benchmark regulation, you may need experienced professional support in helping to ensure that your governance and control frameworks for compliance are suitably robust.
Our team can assist you at any stage of your consideration, whether you are a benchmark administrator, contributor, or user. Our team can help you through the journey to regulatory compliance and provide assurance you are meeting regulatory requirements.
A summary of our specific services includes:
- Governance and control gap analyses to current regulatory requirements and industry best practices
- Review and recommendation of a firm’s design of their front to back governance and control processes for benchmark administrators, contributors and users
- Policy and procedure review and recommendation
- Review and recommendation of regulatory applications
- Independent assurance services (including ISAE 3000 reporting) for benchmark administrators and users.