Focusing on the use of benchmarks, the Financial Conduct Authority’s (FCA) latest guidelines have been drawn up in a bid to increase transparency for investors on how their money is being managed.

UK asset managers will have to describe fund objectives and performance, including detailed explanations on why and how benchmarks are used to help investors assess the performance of a fund. Fund managers must also reference benchmarks consistently in official documents and clearly present performance against each benchmark.

“We’re working to make competition work better in the asset management market and protect those least able to actively engage with their investments,” Christopher Woolard, the FCA’s executive director of strategy and competition, commented. “Today’s remedies build on those we’ve already introduced and will make it easier for investors to choose the best fund for them and help them achieve their investment objectives.”

The FCA has moved to introduce measures to increase transparency on costs and fees in response to its extensive asset management market study published in June 2017. The study argued that the industry in the UK suffers from weak price competition, with some asset managers earning persistently high-levels of profit at the expense of investors.

Other rules implemented by the FCA have so far included annual ‘value for money’ assessments on costs and charges, requiring asset managers to examine the value of funds against a ‘non-exhaustive’ list of elements outlined by the regulator, as well as increased scrutiny on the governance of fund boards, and a proposed ‘all-in-fee’.

The latest rules and guidance on disclosing information on the use of benchmarks are due to be enforced on 7 May for new funds and 7 August for existing funds, the FCA said.

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The indices will be used for benchmarking against European markets and for the creation of new products, providing users of the online Saxo Trader platform with real-time and historical data.

“Saxo Bank is always looking to improve the trader’s position and with Cboe’s introduction of their European indices, Saxo Bank sees the opportunity to make a good indices product available,” said Søren Nedergaard, global head of CFD’s and listed products at Saxo Bank.

“Furthermore, it is a strong base component for calculating the Saxo Bank indication of interest price.”

Cboe Europe currently offers 57 indices, calculated in both price and net return, across 15 markets including 25 national indices, five pan-European indices and two Brexit 50/50 indices. They aim to provide investors and market participants with a low-cost, high-quality alternative to existing benchmarks.

Earlier this month, Cboe gained regulatory approval to act as a benchmark administrator under Europe’s Benchmark Regulation.

The move means the exchange group’s suite of indices are compliant with the requirements, including high standards of governance, oversight and transparency.  

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The European Securities and Markets Authority (ESMA) has tightened rules around financial benchmarks to improve transparency and reduce manipulation. 

In a final regulatory report, ESMA outlined the behaviours and standards expected of administrators and contributors of benchmarks.

The rules will see the process of the provision of benchmarks checked through a new oversight function administrators are expected to implement.

Administrators must be authorised and registered across member states and conflicts of interest should be properly managed, ESMA said.

Potential for manipulation will also be minimised though new rules regarding the methodology of calculation and contribution of input data.

Steven Maijoor, ESMA Chair, explained the regulation ensures the accuracy, robustness and integrity of benchmarks.

“These requirements will ensure that benchmarks are produced in a transparent and reliable manner and so contribute to well-functioning and stable markets, and investor protection,” he said.

The final regulatory report has been submitted to the European Commission for approval which is expected within three months. 

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The Commodity Futures Trading Commission (CFTC) settled charges against Goldman Sachs that the bank had attempted to manipulate and made false reports concerning the US dollar ISDAFix benchmark between January 2007 and March 2012.

The CFTC Order stated that the unlawful conduct involved multiple traders, including the head of its interest rate products trading group in the US.

It is the latest penalty issued by the derivatives watchdog following the $250 million settlement with Citibank earlier this year over its alleged attempt to manipulate the benchmark, and a $115 million settlement with Barclays in 2015.

“This matter, the third enforcement action relating to the ISDAFIX benchmark, demonstrates the breadth of this kind of misconduct across the industry, and within Goldman, the extent of the misconduct across trading desks and product lines,” said Aitan Goelman, the CFTC’s director of enforcement.

He added: “the division will continue to be vigilant and aggressive in protecting the integrity of the ISDAFIX and other important benchmarks relied upon by the markets.”

The derivatives watchdog has racked up a total of $5.2 billion in penalties to banks and brokers over their roles in manipulating benchmarks.

Further fines could be expected for banks, after Citigroup stated in a regulatory filing that the CFTC has opened an investigation into the industry’s trading and clearing of interest rate swaps.

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The European Commission announced it has adopted an implementing regulation to establish a list of benchmarks of ‘particular importance’.

The implementing regulation is to ensure supervisors allow the continuation of ‘critical’ benchmarks - through the use of provision index regulation – where their termination could have “adverse impact on market participants”, the Commission said.

The Euro Interbank Offered Rate (EURIBOR), considered to be a ‘critical’ benchmark, will be the first index to be included in the implementing regulation.

In the regulatory text, the Commission said the EURIBOR benchmark underpins more than €180 billion worth of contracts, and its “crucial importance” must see the EU “enter into force as a matter of urgency”.

Supervisors will be able to request data contributions from banks on benchmarks included on the list, in the case of ensuring its continuation.   

According to the Commission, it will “review and update this list regularly”, and other benchmarks will be added “in due course”. 

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In July 2016 it will be a full four years since the full extent of the London Interbank Offered Rate (Libor) scandal became public knowledge.

Then there were additional investigations into the manipulation of other global benchmarks such as the WM/Reuters London FX rate (the Fix) and LMBA Gold.

They sparked an unprecedented process of reform in the setting and governance of these rates.

Following the findings of the Wheatley Review, the UK created the world’s first benchmark regulation for eight critically important rates. This summer will also see the release of an updated FX Global Code of Conduct by the Bank for International Settlements (BIS), the Financial Stability Board (FSB) will report on the progress of reforms to Libor, Euribor and Tibor (the Ibors), while the Bank of England continues to develop an alternative near risk-free interest rate benchmark.

Far-reaching change

According to David Clark, chairman of the Wholesale Markets Brokers’ Association, the success of benchmark reform in the UK since 2012 can be measured by the “significant changes that have been made in benchmark governance and the introduction of extended Market Abuse Regulation.

“The changes in governance, especially the introduction of comprehensive independent Oversight Committees, are the most significant and have clearly given market users of benchmarks confidence in their integrity.”

The governance and oversight arrangements also focus strongly on the surveillance of benchmark submission and calculation, Clark adds, claiming that this has dramatically reduced the opportunities for manipulation.

Arguably the most extensive of reforms implemented to date are the changes, both planned and already implemented, by the new administrator of Libor, the ICE Benchmark Administration (IBA).

The new surveillance IBA is completely bespoke and represents a significant investment for the group.

Finbarr Hutcheson, president of the IBA, says: “Nothing was available at the time so we built it ourselves, which I think was far more successful – specific to Libor – and we have since been able to adapt that for the other benchmarks we produce for swaps and gold.

“If I distil the Wheatley report to a single message it is this: there was a significant conflict of interest amongst the banks and the British Bankers’ Association (BBA),” Hutcheson adds.

Understandably the BBA, Libor’s former administrator, was run as an industry organisation rather than as a professional benchmark business, he explains.

While this made sense in the past, at some point the benchmark grew too big and the inherent conflict of interest needed to be addressed.

“We have learnt that lesson with a vengeance,” Hutcheson adds. In addition to Libor, the IBA has also taken over the governance of LBMA Gold, ISDAFIX (now the ICE Swap) and will be launching a further product in the summer summer called ISDA SIMM (Standard Initial Margin Model), which is part of the calculation for collateralising uncleared derivatives.

“We continue to fulfil the function of an independent, conflict free administrator that can bring together and provide value to the market where they need an independent organisation to produce data or information,” Hutcheson adds.

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“It is less generic than Libor which is used everywhere – including Main Street – mortgages and funding and so on,” says Ben Larah, manager, Sapient Global Markets.

While it may not be as well known as Libor, for pension funds, insurers and other institutional derivative users hedging their interest rate exposures, ISDAfix is of massive significance. According to a report released in 2014 by the International Swaps and Derivatives Association (ISDA), the swaptions market alone currently stands at $30 trillion in notional outstanding contracts.

Mustering evidence

The ramifications for derivatives users, and the banks manipulating the rate, are huge, with losses potentially running into the billions. Lawyers have been mustering evidence to seek reimbursement for losses but it has been a slow process. So far, only one case has made it to court – last year’s claim brought by the Alaska Electrical Pension Fund against 13 banks who, it says, set ISDAfix at artificially low levels to manipulate the payments to investors in the derivatives.

Given the esoteric nature of the instruments – which are not centrally cleared, due to their lack of standardisation and are less frequently traded than other types of OTC derivatives – getting a handle on who has suffered what is tricky. At the same time, the legal complications of instigating a case, particularly in Europe, complicate matters further. The class action rule in the US – which allows lawyers to file a general complaint on behalf of a larger group of persons, through a single complaint – means that it is much easier to bring cases of market manipulation over there. European courts demand that all complainants are represented.

“You need to find sufficient number of aggrieved parties to do it in Europe,” says Alberto Thomas, partner at consultancy Fideres. “You need to find $10bn in transactions to make it viable so you need to actively approach institutional investors. It is a lot of work to get critical mass.”

At the same time, however, participants argue that there is a significant amount of evidence to implicate banks in the affair. Thomas says that unlike Libor, where most of the post-2008 manipulation was carried out by banks seeking to artificially lower their borrowing costs and ths presenting a better picture of their corporate health, ISDAfix manipulation was carried out opportunistically, with the intention of getting better prices on trading books filled with swaptions and other interest rate products through activities like “banging the close”.

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