By to: Principles for Financial Benchmarks Consultation Report

Size: px

Start display at page:

Download "By to: Principles for Financial Benchmarks Consultation Report"

Phillip Cameron
6 years ago
Views:

16 May 2013 Mr Alp Eroglu IOSCO Calle Oquendo 12 28006 Madrid Spain By e-mail to: BenchmarkPrinciplesconsultationresponses@IOSCO.

1 16 May 2013 Mr Alp Eroglu IOSCO Calle Oquendo Madrid Spain By to: Dear Mr Eroglu Principles for Financial Benchmarks Consultation Report The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of 5.1 trillion of assets, which are invested on behalf of clients globally. These include UCITS, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK UCITS. The IMA's authoritative Asset Management Survey 2012 recorded that IMA member firms were managing 38% of the domestic equity market for clients. We welcome the opportunity to comment on the discussion and proposals made in your paper. Our answers to specific questions are attached below. Index versus Benchmark We would like to highlight the difference between indices and benchmarks. Indices are produced and published on a commercial basis, and are based on the price, value or amount of various financial instruments or holdings. What is defined as a Benchmark in the Glossary to your paper is actually an Index. A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and marketsegment stock and bond indices are used for this purpose. 65 Kings wa y Lo nd on W C2B 6TD Tel: +44(0) Fax: +44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 Thus, an index can be used as a benchmark, but need not be. The definition, in the third part of section c), refers to this use of an index as a benchmark. The other two uses of the index, to price financial instruments and calculate interest due are using the index as something other than a benchmark. Use of Indices by IMA members Our members are users of indices as benchmarks, rather than contributors to, or producers of, indices. Nor would they normally use indices for either pricing financial instruments or calculating interest payable. While they may use indices or combinations of indices (e.g. 50% FTSE 100, 40% MSCI Emerging Markets and 10% LIBOR) as benchmarks against which to measure the performance of a client s portfolio, they do not contribute to or produce indices themselves. Some may take the raw data provided by an index, such as LIBOR, and perform certain adjustments to make it usable as a benchmark against which they can measure the performance of the portfolios or funds that they manage. It is, therefore, important that the definition of an index, or Administrator, created as a result of this consultation, does not catch such use of indices as benchmarks, and inadvertently impose the duties of producers of indices on those using them as benchmarks in such a way. Inadvertent Benchmark Administration One risk we perceive is the scope for those bodies that provide information on the financial services industry to, inadvertently, become Benchmark Administrators, solely due to the action of third parties choosing to use the information provided for one of those purposes set out in part c) of the definition. Information providers should be able, in some way, to defend themselves from the possibility that third parties could use their information in a way which was not intended and impose, as a consequence, considerable onerous and expensive burdens on them. The mere fact that another entity chooses to use information that you produce, without your knowledge, permission or involvement, to price a financial instrument, should not result in your information being treated as an index, with all the resulting responsibilities and liabilities. The proposed definition of Benchmark is so broad that a wide range of data providers, including those who are not producing their information on a commercial basis, or with the intention that it may be used as a benchmark would be caught by the definition. Unless these unintentional benchmark administrators are either excluded entirely from the definition or recognised as being of a different nature from those intentionally operating as benchmark administrators then there could be detrimental unintended consequences, both for them and for those using the information that is currently provided for purposes unconnected with the scope of this consultation. This could possibly prevented by a proportionate application of the principles at a national level, with national regimes requiring a cost benefit analysis as part of an

3 intelligent and pragmatic implementation of the IOSCO principles to their local situation. We look forward to hearing from you if there is any clarification that you would find useful on the points we have raised. We would be happy to discuss the thinking behind any of our answers. Yours sincerely Adrian Hood Regulatory Adviser

4 Financial Benchmarks Consultation Report Equity indices Q1: Indices may be used to measure a wide range of underlying Interests, using a variety of calculation methodologies and inputs. In the specific case of equity indices, inputs are typically based on transactions concluded on Regulated Markets. In light of this: are there any principles or parts of the principles that cannot, or should not, be applied to equity indices? If so, please identify these principles and explain why their application is inappropriate. We approve of the proportionate application of the Principles to different types of indices. It is important to differentiate between rate benchmarks, such as LIBOR and EURIBOR, which are currently based on subjective estimates, and market indices, which are either wholly or largely based on financial transactions Additional measures to address risks resulting from Submission-based Benchmarks or ownership or control structures Q2: Additional measures have been specified within certain principles to address specific risks arising from a reliance on Submissions (principles 4, 10, 13 and 17) and/or from ownership or control structures (Principles 2, 5 and 16). a. Should these additional requirements apply to Submitters and Administrators of all submission-based Benchmarks or Benchmarks with the specified ownership/control structures? b. If not, please explain why all or some submission-based Benchmarks or Benchmarks with the specified ownership/control structures should be exempt. a. Yes. We approve of the proportionate application of additional requirements to indices which are reliant on subjective submissions. b. N/A Notice Concerning Use of Expert Judgment Q3: Should Administrators be required to briefly describe and publish with each benchmark assessment: a. a concise explanation, sufficient to facilitate a User s or Market Authority s ability to understand how the assessment was developed, terms referring to the pricing methodology should be included (e.g., spread-based, interpolated/extrapolated or estimate-based); and b. a concise explanation of the extent to which and the basis upon which judgment (i.e. exclusions of data which otherwise conformed to the requirements of the relevant methodology for that assessment, basing assessments on spreads, interpolation/extrapolation or estimates, or weighting bids or offers higher than concluded transactions etc.), if any, was used in establishing an assessment.

5 a. Yes b. Yes Revisions to the principles Q4: Please provide any suggested changes to specific principles or definitions of key terms set out in Annex A, including drafting proposals and rationale. Are any other principles needed: Should principles to address any additional issues, risks or conflicts of interest be developed? Please provide a summary of the issue and drafting for the proposed principle. Principle 3 The conflict of interest framework should not avoid, mitigate or disclose conflicts of interest as this would allow an Administrator to mitigate a conflict, and thus not disclose it. All conflicts that cannot be avoided should be mitigated as much as is reasonable and then the residual conflict, not just material conflicts, should be disclosed. Principle 5 The internal oversight committee should include a balanced representation of appropriate stakeholders, Subscribers and Submitters, whether there are conflicts of interest arising from the ownership structures or not. Principle 11 The principle should recognise that there is a significant difference between changes to the methodology used to produce the index, and rebalancing of the composition. It is important that the methodology sets out clearly the criteria and process for such rebalancing. Administrators should give stakeholders, including the users of the index, at least sufficient prior notice to any change of methodology, and ideally they should discuss such changes with stakeholders prior to final decisions being taken. They should notify stakeholders of any rebalancing of the composition of the index. Definition of Benchmark The definition should be reworded to ensure that those bodies that, for example, provide information on the financial services industry do not inadvertently become Benchmark Administrators, solely due to the action of third parties choosing to use the information provided for one of those purposes set out in part c) of the definition. Information providers should be able, in some way, to defend themselves from the possibility that third parties could use their information in a way which was not intended and impose, as a consequence, considerable onerous and expensive burdens on them. The mere fact that another entity chooses to use information that you produce, without your knowledge, permission or involvement, to price a financial instrument,

6 should not result in your information being treated as an index or benchmark, with all the resulting responsibilities and liabilities. The proposed definition of Benchmark is so broad that a wide range of data providers, including those who are not producing their information on a commercial basis, or with the intention that it may be used as a benchmark will be caught by the definition. Unless these unintentional benchmark administrators are either excluded entirely from the definition or recognised as being of a different nature from those intentionally operating as benchmark administrators then there could be detrimental unintended consequences, both for them and for those using the information they currently provide for purposes unconnected with the scope of this consultation.

UniCredit reply to IOSCO on Principle for Financial Benchmarks

For publication 14 May 2013 UniCredit reply to IOSCO on Principle for Financial Benchmarks UniCredit is a major international financial institution with strong roots in 22 European countries, active in