IOSCO’s Review of the Implementation of IOSCO’s Principles for Financial Benchmarks by Administrators of Libor, Euribor and Tibor was published today as part of the Financial Stability Board’s (FSB) report on Reforming Major Interest Rate Benchmarks. The IOSCO Report assesses the three major interest reference rates against the internationally agreed and endorsed IOSCO Principles for Financial Benchmarks.
The IOSCO Report was prepared by a Review Team of IOSCO members in response to the FSB request to conduct a review of the three major interest rate benchmarks against the IOSCO Benchmark Principles. Consistent with the FSB request, the objective of the IOSCO review was to identify the degree to which the administrators of Libor, Euribor and Tibor have implemented these principles.
The report finds that both completed and on-going reforms have raised the overall oversight, governance, transparency and accountability of the three administrators and their respective benchmarks. This has undoubtedly improved the quality and integrity of the three benchmarks. IOSCO also notes that these reforms have occurred in the context of regulatory, operational and organisational changes concerning all three administrators.
All three administrators have made good progress in implementing the principles related to governance, reflecting the primary focus of the reform process to date. In general, the administrators also have implemented the transparency and accountability principles. Further work is still needed on benchmarks’ methodology and design. Libor and Tibor administrators need to devote more attention to the management of conflicts of interests.
A particular challenge is posed by the assessment of Principle 7, which stipulates that “the data used to construct a benchmark determination should be sufficient to accurately and reliably represent the interest measured by the benchmark.” To date, none of the administrators has provided IOSCO with all of the required data or analyses needed to demonstrate compliance with Principle 7. Therefore, none of the administrators were rated against Principle 7. IOSCO strongly encourages the three administrators to continue addressing Principle 7 as a matter of urgency.
IOSCO has made recommendations for each administrator on remedial action that would strengthen the implementation of the principles. IOSCO expects each Administrator to act on these recommendations as expeditiously as possible. By end 2014 (or earlier if required by the relevant regulatory authority), each administrator should develop and submit to its regulatory authority, where available, its work plan to address the remediation recommendations for all principles.
Because further reform work is required, particularly with respect to data sufficiency, IOSCO recommends conducting a further implementation review of the three administrators in mid-2015. This further review would seek to identify whether administrators have made any progress in addressing the recommended remediation work set out in the Report.
"Interest rate benchmarks underpin the functioning of financial markets," IOSCO Board Chair Greg Medcraft said. "IOSCO's review is an important part of the FSB's work on interest rate benchmarks and demonstrates the strength of our standards and of our assessment capability."
Martin Wheatley, the Chief Executive Officer of the UK Financial Conduct Authority and co-Chair of the IOSCO Board-Level Task Force on Financial Market Benchmarks, said: “This is an important contribution to the efforts to restore confidence in benchmarks. I am pleased that the recommendations by IOSCO and the FSB reflect many of the reforms to LIBOR we’ve already put in place. But a new framework is just one part of the equation - what people will want to see is evidence of good conduct.”