IOSCO Report on Financial Benchmarks; e.g., LIBOR (with Lofchie Comment)

IOSCO is requesting comments from the public on policy issues arising from the work of its Board Level Task Force on Financial Market Benchmarks. IOSCO's published Consultation Report discusses potential policy guidance and principles for Benchmark-related activities generally, but does not make recommendations with respect to specific benchmarks (e.g., LIBOR). It identifies Benchmark-related policy issues across securities, derivatives, and other financial sectors including:

• "The appropriate level of regulatory oversight of the process of Benchmarking;
• Standards that should apply to methodologies for Benchmark calculation;
• Credible governance structures to address conflict of interests in the Benchmark-setting process within the reporting financial institutions as well as in the oversight bodies; and
• The appropriate level of transparency and openness in the Benchmarking process."

In addition, the Consultation Report considers issues that market participants might confront when seeking to make the transition to a new or different Benchmark.

Comments Due: February 11, 2013.

Lofchie Comment: It seems a given that we will have far more governmental regulation of the publication of indices in the coming year, with the questions being (i) how much governmental involvement and (ii) by what regulators, the latter question being particularly interesting as to indices that have international components. It also seems possible that there will be fewer recognized indices, which will raise questions as to whether this has an effect on financial markets going forward and what happens to contracts that are tied to a benchmark index that is discontinued. Even as to benchmarks that continue to be calculated under any new regulatory framework, firms should consider whether there is some risk that there will be imposed a new method of calculation that produces a materially different result from the current method of calculation. This need not be because either the prior or the new method of calculation is superior; it may just be that the new method of calculation differs from the prior method. In this regard, firms may wish to consider whether to add to new agreements that have payments tied to a benchmark a provision for the possibility of terminating or modifying such agreements if the method of calculating a benchmark by which payments under the agreement are calculated is subject to material change. I also wonder if the added regulation of industry benchmarks, such as LIBOR, will have some spillover effect as to the procedures that are required where firms produce proprietary indices that are used to determine payments for proprietary investment products.

See: Financial Benchmarks Consultation Report.See also: British Banking Association Reports on LIBOR Consultation Findings See also: The Wheatley Review of LIBOR