The UK’s Financial Services Authority (FSA) has finalized new rules and regulations for financial benchmarks, initially focused on the London Inter-Bank Offered Rate (LIBOR), days before the FSA is due to be replaced by two separate regulators, the Financial conduct authority and (FCA) and the Prudential Regulation Authority (PRA).
Benchmarks are used across financial markets in a broad range of activities. The total volume of financial contracts that reference LIBOR is estimated to be at least $300 trillion. Like other benchmarks, LIBOR has historically been set by the financial markets themselves, and existed outside of any regulatory regime. In the case of LIBOR, this industry-led approach has failed. On 2 July 2012 the Chancellor of the Exchequer commissioned a review of the structure and governance of LIBOR and the corresponding criminal sanctions regime. On 28 September 2012 ‘The Wheatley Review of LIBOR’ was published, which included a 10-point plan for comprehensive reform of LIBOR including that LIBOR activities should be brought within the scope of statutory regulation.
After consultations, the Government has now inserted provisions into the Financial Services Act 2012 to allow the regulation of activities in relation to benchmarks. The legislation will commence on 1 April 2013.
A key element of the final rules is that the new administrator will be required to play a much more active role in corroborating submissions and monitor for any suspicious activity. Other clarifications and adjustments include the requirement to have two independent non-executive directors on the LIBOR administrator's oversight board, reduced annual fees and record-keeping requirements in line with the European Markets in Financial Instruments Directive.
Alongside the consultation paper, the FSA published a cost-benefit analysis of the proposals, which estimated that the new Libor administrator would face annual costs of up to £1 million ($1.5 million), in addition to start-up costs of around £1.6 million. Submitting banks will also face costs of around £545,000 a year and one-off costs of around £2.5 million.
Martin Wheatley, CEO designate of the FCA, said: “Confidence and trust are critical to financial markets. That trust has been eroded by the LIBOR scandal and the recent enforcement action against several banks. These new rules today should help restore that faith and bring integrity back to LIBOR.”
Link to FSA Policy PS13/6: The regulation and supervision of benchmarks - Click Here