What is the new Financial Benchmark Regime?

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On 12 June the Australian Securities & Investments Commission (ASIC) announced the final regulatory regime for Financial Benchmarks. This regime, introduced through a 2018 amendment to the Corporations Act 2001, empowers ASIC to determine that certain benchmarks are ‘significant’ and to impose a licensing regime on the ‘administrators’ of those benchmarks. In today’s article, we ask, what is the new Financial Benchmark Regime?

What is the new Financial Benchmark Regime?

Photo by Paul Gilmore on Unsplash

By Dr Drew Donnelly, Regulatory Specialist, Compliance Quarter

Background: What is a Financial Benchmark?

A Financial Benchmark has been defined as:

an index or indicator calculated from a representative set of underlying data or information, used as a reference price for a financial instrument or financial contract or to measure the performance of an investment fund.[1]

Reliable Financial Benchmarks are crucial to the operation of financial markets. If Financial Benchmarks are inaccurate, that is, they fail to reflect underlying forces of supply and demand, financial markets cannot efficiently allocate capital. Inaccurate Financial Benchmarks can happen for a range of reasons, including intentional behaviour of traders, such as:

  • trading with the intent of altering a benchmark rate for a financial institution’s own benefit;
  • inappropriate handling of client orders or positions;
  • inappropriate disclosure of confidential client information (e.g. by disclosing client orders to traders at competing banks);
  • inappropriate submitter conduct (e.g. by making submissions in order to reduce the institution’s borrowing costs).[2]

A licensing regime has been introduced in order to counteract and prevent such behaviour.

The Five Significant Financial Benchmarks

The five significant Financial Benchmarks are:

  • The Australian Bank Bill Swap Rate (BBSW) administered by ASX Benchmarks Pty Ltd. This identifies a set of key short-term interest rate benchmarks for the Australian dollar and is the key reference rate used by issuers of securities in Australian dollars;
  • The S&P/ASX200 Index administered by S&P Dow Jones Indices LLC. This is an equity index which measures the performance of the 200 largest index-eligible stocks listed on the ASX;
  • The ASX Bond Futures Settlement Price administered by ASX Clear (Futures) Pty Limited. This is used to calculate the value of Bond futures contracts for 3-, 10- and 20-year Australian Government bonds listed on the ASX;
  • The Australian Interbank Overnight Cash Rate administered by the Reserve Bank of Australia. This consists in the weighted average of the interest rate at which overnight unsecured funds are transacted in the domestic interbank market. The Cash Rate is the Reserve Bank Board’s operational target for monetary policy and is also an important benchmark for the Australian financial markets.
  • The Australian Consumer Price Index (CPI) administered by the Australian Bureau of Statistics.  This measures quarterly changes in the price of a range of goods and services which are a significant portion of household expenditure. It is a benchmark in a for many financial products, including bonds and derivatives.[3]

The Financial Benchmark Licensing Framework

Under Part 7.5B of the Corporations Act 2001, ASIC is empowered to set up a licensing regime for administrators of financial benchmarks that are designated ‘significant’. Central to the licensing regime for the administrators of these Financial Benchmarks are the following obligations:

  • a requirement to act efficiently, honestly and fairly in generating and administering each benchmark specified in its licence;
  • having adequate arrangements for the governance and management of the licensee. These must be reviewed, audited and tested periodically;
  • if outsourcing any of the functions involved in generating or administering a licensed benchmark, documenting this and having adequate arrangements put in place to ensure compliance;
  • transparency to the public with respect to the benchmarks;
  • a requirement to co-operate with ASIC;
  • having adequate arrangements for handling conflicts of interest in relation to generating and administering each of its licensed benchmarks;
  • a requirement to have sufficient human, technological and financial resources in place;
  • record-keeping obligations.

To read more about the new Financial Benchmark regime go to https://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-171mr-asic-implements-financial-benchmark-regulatory-regime/.

Feel free to leave a comment or contact us if you’d like further information or have any questions.

 

[1] See ASIC Report 440: Financial Benchmarks (2015) at http://download.asic.gov.au/media/3285136/rep440-published-8-july-2015.pdf, para 20.

[2] Ibid, para 46.

[3] See ASIC Corporations (Significant Financial Benchmarks) Instrument 2018/420, section 5 and associated Explanatory Statement, section 4.

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