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

Friday January 5 2018

On 4^th December 2017, IOSCO published a statement setting out matters for users of financial benchmarks (benchmarks) to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available.

Benchmarks play a key role in the financial system’s core functions of pricing and allocating capital and risk. They impact enormous volumes of credit products (including loans, mortgages, structured products, short-term money market instruments and fixed income products) and derivatives and have other uses.

In July 2013, IOSCO published the Principles for Financial Benchmarks (Principles) which addressed conflicts of interest in benchmark-setting processes, as well as other matters related to benchmarks. IOSCO’s previous work focused on the responsibilities of administrators of benchmarks and submitters to benchmarks. The statement, in contrast, is directed at users of benchmarks. Users are encouraged to consider the matters covered by the statement, as appropriate.

The statement sets out matters for users of benchmarks to consider. These fall into two overarching categories. First, there are matters related to assessing the appropriateness of a benchmark, in both its initial selection and ongoing use. Second, there are matters related to contingency planning, such as if the selected benchmark becomes unavailable. In both cases, the statement recognises users’ reliance on benchmarks, aims to increase awareness of the risks involved and encourages their mitigation, where appropriate.

The statement recognises that, in many instances, users of benchmarks may not be able to provide any input to the characteristics of a benchmark or the terms of existing financial instruments which reference them. In cases where a benchmark is used in a contract between a financial firm and a retail client, for example, the retail client is likely to have little ability to change contractual terms. The financial firm is likely to have responsibilities towards that client. In considering the matters set out in the statement, it would also therefore be appropriate for the financial firm to consider its client’s interests in a manner consistent with those responsibilities.

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