IOSCO Statement on Matters to Consider in the Use of Financial Benchmarks

Executive Summary On the 5th January 2018, the International Organisation of Securities Commissions (IOSCO) has published a statement setting out matters for users of financial benchmarks to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available. 1. Considerations of appropriateness It is important that users select a benchmark appropriate for their own current and future needs, as well as (where applicable) those of their clients. Examples of relevant considerations of appropriateness for a user could be, to the extent they are applicable:
  • the way in which the benchmark is determined, including the size, liquidity and potential evolution of the market being measured by the benchmark and other aspects of the relevant methodology, along with the transparency of the methodology;
  • whether the benchmark provides an appropriately accurate and reliable representation of the market it seeks to measure, and is likely to remain so, and how factors that might result in a distortion of the price, rate, index or value of the benchmark are eliminated or reduced;
  • in the case of interest rate benchmarks, whether or not it is desirable or necessary for the benchmark to include a term risk or credit risk element;
  • how the benchmark is disseminated to users;
  • the governance of, and accountability for, the benchmark determination process;
  • the process by which changes to the benchmark’s methodology can be made, e.g. relevant consultation procedures;
  • how the administrator deals with significant decisions affecting the compilation of the benchmark and any related determination process, including contingency measures in the event of insufficient or no inputs (e.g. the use of expert judgment), market stress or disruption, and failure of critical infrastructure;
  • the provisions which could apply in the event of material changes to the benchmark and how they would operate in practice; and
  • whether and under what circumstances, provisions relating to cessation of the benchmark should apply.
  2. Contingency plan / Article 28(2) fall back provisions Users are encouraged to produce and maintain clear, comprehensive and robust written policies and procedures on actions they would take in various factors, including external factors beyond the control of an administrator of a benchmark, might result in material changes to, or cessation of, the benchmark, including where an administrator is no longer able to determine a reference rate or other figure for whatever reason. Where feasible and appropriate, contingency plans for the cessation of a benchmark should include users’ having sufficiently robust fall back provisions in their financial contracts and instruments. These provisions should ideally involve at least one alternative or fall back rate and/or other figure as a substitute for the benchmark originally referenced should it no longer be available. Users should also seek to reflect their contingency plans in their contractual arrangements. In determining the suitability of a particular alternative rate or figure, factors that would be important for users to consider, as appropriate, include:
  • how credible the alternative rate or figure would be, including how closely the alternative matches the original benchmark’s characteristics, how economic differentials between the alternative rate or figure and the original benchmark figure are minimised, the extent to which an alternative rate or figure meets the needs of the parties and the availability of data on the alternative rate or figure;
  • whether and how the original benchmark and the alternative rate or figure could be maintained in parallel for some time in order to accommodate an orderly transition to a new benchmark;
  • the time at which the fall back rate or figure would start to operate, taking into account the term of the contracts and the tenor of the financial instruments referencing the benchmarks, and the adequacy of notice involved; and
  • the impact on the economic value of the financial contracts and instruments referencing the benchmark, in particular ensuring that the alternative rate or figure would be reasonable and fair.
  The full statement is available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD589.pdf For more information please contact our Legal Team Gregory Nicolas – Director, Legal, Compliance & Corporate Elizabeth Parker – Legal Counsel Sokayna Mulquin – Legal Counsel