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On 24 January 2020, the FCA signalled its increasing focus on ensuring the integrity and resilience of benchmarks by publishing a specific benchmark administrators' supervision strategy (PDF 191 KB). This emphasises, alongside the implementation of the EU Benchmark Regulation (EU BMR), the ongoing regulatory scrutiny of the production and administration of benchmarks in the wake of the LIBOR and FX rates manipulation cases.

Benchmark administrators should review the letter in detail to ensure that they are meeting the FCA's expectations. Given the FCA has clearly signalled its areas of concern in this letter and its intention to supervise proactively, it is essential that firms are prepared to demonstrate that they have robust systems and controls in the focus areas.

The letter also highlights upcoming events that benchmark administrators need to prepare for: implementation of the Senior Manager & Certification Regime (SMCR) in December 2020, end of the post-Brexit transition period at end-2020 and LIBOR cessation at end-2021.

FCA Supervision Strategy

To address the harm sub-standard quality benchmarks could cause to consumers or markets, the FCA:

  • Expects firms to regularly review governance and controls that ensure robust data. The FCA will do its own review in the next two years including on-site visits.
  • Will review benchmark statements and compliance with EU BMR. It will contact firms if it believes improvements are necessary.
  • Expects firms to regularly review recalculation and cessation policies to ensure information is clear and meets users' needs. The FCA will review a sample and provide feedback where necessary.
  • Expects firms to oversee outsourced arrangements to the same standard as activity undertaken within a firm.

To address the risk of market disruption from poor management of the cessation or recalculation of benchmarks or lack of operational resilience at firms, the FCA:

  • Will 'engage with larger firms in the portfolio regarding their operational resilience and share findings more widely'.
  • Expects firms to consider their reliance on third parties to provide critical services in the context of their overall operational resilience.
  • Expects firms to report any material operational incidents under Principle 11.

The FCA also highlights other areas of focus:

  • SMCR will capture benchmark administrators from December 2020. The FCA encourages firms to review and respond to its consultation. Given the requirements are unlikely to change considerably before finalisation, firms should be considering now how to implement the proposed framework.
  • Brexit preparation - firms should consider how the end of the implementation period will affect them and their customers and what action needs to be taken to be ready for 1 January 2021.
  • Preparation for LIBOR cessation at end of 2021 - if firms administer benchmarks which reference LIBOR or LIBOR-related products, or use LIBOR in the operation of their business, the FCA emphasises that these firms will need to make changes to transition to alternative rates and communicate accordingly with their users.

The letter also highlights the FCA's concern that customers are paying excessive fees and charges resulting from high switching costs and complex licensing arrangements of benchmarks, and that competition is not working well in the provision of benchmarks. This could be heightened if accessing data from underlying markets becomes harder or more expensive. The FCA is planning a `call for input' on this issue and wider concerns on the access and use of data in wholesale financial markets.

Next Steps

Benchmark administrators should ensure that they have an effective compliance monitoring and review programme to demonstrate ongoing compliance with the EU BMR requirements, as well as the FCA's regulatory expectations. This could be built into wider transformation projects, for example in the context of operational resilience or the SMCR.

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