ING feedback on the IOSCO consultation document on financial benchmarks

Size: px

Start display at page:

Download "ING feedback on the IOSCO consultation document on financial benchmarks"

Shon Norton
5 years ago
Views:

1 ING feedback on the IOSCO consultation document on financial benchmarks 8 February 2013 About ING ING is a global financial institution of Dutch origin, offering banking, investments, a variety of life insurance, non-life insurance and retirement services to meet the needs of a broad customer base. Going forward, we will concentrate on our position as an international retail, direct and commercial bank, while creating an optimal base for an independent future for our insurance and investment management operations. With more than 93,000 employees, we serve over 66 million private, corporate and institutional customers in over 40 countries in Europe, North America and Latin America, Asia and Australia. We draw on our experience and expertise, our commitment to excellent service and our global scale to meet the needs of a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments. Introduction ING welcomes the opportunity given by IOSCO to provide feedback on the consultation document on financial benchmarks. In reply to the IOSCO consultation, please find below the input from ING. ING Bank Treasury is contributing to multiple benchmarks. Some of them imply solely transaction data input while others only require qualitative input. For the purpose of this exercise, ING has based its responses in Euribor and Eonia since they are the most important benchmarks in the euro area.

2 Principles ING is of the opinion that any benchmark should adhere to the following principles: 1. A benchmark should be based on actual trade data to avoid subjectivity. Panel banks should only submit contributions when there is actual data. If insufficient actual trade data is available estimated data or extrapolation could be used. The responsibility of extrapolation should be done by the benchmark governing body. A strong governance framework should be in place to point out what submissions are based on actual trade data and what submissions are based on estimation / extrapolation. 2. A clear and unambiguous code of conduct should be available per benchmark. The code of conduct should contain clear definition of the submission criteria, detailed processes, responsibilities and controls. 3. Benchmarks should be governed and published by public institutions. Statutory regulation of benchmarks should be introduced to assure credible independent supervision, oversight and enforcement. 4. The panel composition is the responsibility of the governing body. The panel should be a true reflection of the underlying market. Clear criteria should be in place on the composition criteria for the panel. 5. Volumes should be taken into account in the individual submission of participants and in the calculation of the overall fixing. Calculations should be made computing contributions as weighted average of the transactions undertaken for the relevant benchmark. 6. The individual contribution (including volume) of participations should not be published to avoid reputational risk and manipulation. This is also the current practice for Eonia. Alternatively the publication of individual contributions should lag by a certain period (i.e. 90 days). 7. Governance for contributing banks needs to include robust processes and effective controls specifying concrete parameters to contribute rates. The controls should be part of internal processes and procedures and will be externally audited.

3 IOSCO Consultation Chapter 1 Scope Question 1: Yes, agree with the scope of the report and intended audience. Chapter 2 Benchmark design Question 2: Yes, agree since this is in line with ING principles 4 and 5. Quality and integrity of Methodologies Question 3: In line with ING principle 1, a benchmark should be based on actual trade data and a strong governance framework should be in place to point out what submissions are based on actual trade data and what submissions are based on estimation / extrapolation. Question 4: Submitters should adhere to a clear and unambiguous code of conduct. The code of conduct should contain clear definition of the submission criteria, detailed processes, responsibilities and controls. The code of conduct should, in any event, cover the following aspects: Four eyes principle approach followed in all different stages of the submission Adequate level of seniority of submitters Internal controls performed to validate data and processed by internal control functions Regular training Transparency of Benchmarks methodologies Question 5. A level of granularity to ensure the integrity of benchmarks can be provided from different perspectives: a/ Regulator perspective; b/ Governance for contributing bank perspective; and c/ System perspective a/ From a regulatory perspective set up appropriate regulatory body and environment that provides: i) Uniformity on the regulation to govern all data and panel bank contributions ii) Centralized and robust oversight iii) Independence of the governance body of the index b/ Governance for contributing banks need to have robust processes and effective controls in place specifying concrete measure to contribute rates. The controls will be part of internal process and procedures. Those controls will include: iv) Appointment of authorized persons to contribute The criteria to designate contributors will take into account the appropriate skills and experience as well as independence in order to guarantee that there are no conflict of interest between

4 various departments; v) Methodology used for the contribution with clear guidance to exercise the expert knowledge judgment when contributing rates; vi) Senior management involvement on the process; vii) Roles of 2 nd line of defense to monitor 1 st line and ensure integrity on the contribution rates; viii) Record keeping and audit logs referencing location and duration of records. c/ Adequate management systems and controls to ensure the integrity and reliability of submissions with fully auditable capabilities. Several measures could be taken into account to achieve more transparency in contributions: Regulations that provide clear and transparent specification of what the benchmark measures, how its accuracy can be evaluated, and what its shortcoming are and what it should and not should be used for. The benchmark provider should have obligations in respect of ensuring the integrity not just of the calculation and dissemination of the index but also the oversight of the process of submitting the underlying data. Assess the inclusion of non-interbank transactions and broader range of Money Markets liabilities. This could include CD/CP, and liabilities with insurance companies, as well as other type of Money Markets instruments to professional investors. A clear and unambiguous code of conduct should be available per benchmark. The code of conduct should contain clear definition of the submission criteria, detailed processes, responsibilities and controls. Volumes should be taken into account in the individual submission of participants and in the calculation of the overall fixing. Calculations should be made computing contributions as weighted average of the transactions undertaken for the relevant benchmark. Transparency of contingency provisions for episodes of market disruption, illiquidity or other issues Question 6. In case that actual trade data is unavailable and estimated data is to be used, the Administrator should disclose to the Market Participants clear and transparent parameters to determine the data. The criteria should be clearly communicated to all stakeholders. Transparency over changes to the Methodology Question 7. An Administrator should be governed by a clear and unambiguous code of conduct that contains clear definition of the submission criteria, detailed processes, responsibilities and controls (ING Principle 2). Question 8. The review of the design and definition of the Benchmark should be done yearly and when market developments require and additional review. Governance Question 9: Governance for contributing banks needs to include robust processes and effective

5 controls specifying concrete parameters to contribute rates. The controls should be part of internal processes and procedures and will be externally audited (ING Principle 7). Question 10: Yes, agree. ING has based its responses in Euribor and Eonia since they are the most important benchmarks in the euro area, and therefore considers the second part of this question as not applicable. Accountability Question 11: This goes in accordance to ING principle 2. Question 12: ING considers these measures to be sufficient in accordance to the principles drafted. ING cannot anticipate further measures at present. Question 13: The controls should be part of the Submitters internal processes and procedures and externally audited. A yearly external audit should be sufficient unless circumstances arise that prompt for need to have additional audits. Accountability of the Administrator Question 14: ING considers these measures to be sufficient in accordance to the principles drafted. ING cannot anticipate further measures at present. Question 15: A yearly external audit should be sufficient unless circumstances arise that prompt for need to have additional audits. Question 16: Benchmarks should be governed and published by public institutions. Statutory regulation of benchmarks should be introduced to assure credible independent supervision, oversight and enforcement. Code of conduct for Submitters Question 17: ING agrees with the elements of the code mentioned and any other measure that can strengthen the robustness of the code of conduct. Example given, the inclusion of the internal submitters control functions would strengthen the robustness of the code of conduct. Question 18: ING believes that a benchmark should be based on actual trade data to avoid subjectivity. On that basis, a clear an unambiguous code of conduct should be available per benchmark. The code of conduct should contain clear definition of the submission criteria, detailed processes, responsibilities and controls. In case that actual trade data is unavailable and estimated data is to be used, the Administrator should disclose to the Market Participants clear and transparent parameters to determine the data. The criteria should be clearly communicated to all stakeholders. Chapter 3 Approaches to enhance oversight Question 19:

6 Advantages: Having a governance body will provide with accountability for the sound operation of the benchmark. Regulating the governance of the benchmark contributions will increase independence and create a robust environment: o Independency Broadening the membership of the committee not just to contributor members but to other parties i.e. representative from the regulator, etc. o Robust environment by establishing a clear code of conduct related to policies and procedures concerning submissions. Index setting would become a regulated activity with the oversight and uniformity of rules that it implies. This would allow imposing sanctions and disciplinary actions over contributors that do not adhere to the rules, increasing the reliability of the benchmark. Disadvantages: When self-regulated, banks can have the option to contribute or not. This could impact the composition of the panel, and ultimately the reliability of the benchmark. Cost increase on contributing banks to comply with new regulations. Statutory regulation of benchmarks should be introduced to assure credible independent supervision, oversight and enforcement. Question 20: Advantages: When this activity is regulated, contribution is not at the discretion of the panel but will be mandatory once that the panel commits to contribute. As a consequence of this, the number of contributing banks will increase, which will result in a decrease in collusion. The regulatory nature of contributions by the panel banks will impact the credibility and importance that firms and individuals attach to the index submissions being accurate and reliable. Disadvantages: If regulation is not developed consistently across jurisdictions, this could lead to inconsistent implementation of rules and therefore non harmonized contributions by various banks. Question 21-24: ING has based its responses in Euribor and Eonia since they are the most important benchmarks in the euro area. These questions are not applicable since they include a broader scope than the mentioned benchmarks. Question 25: A clear and unambiguous code of conduct should be available per benchmark and it should provide sufficient oversight to mitigate the risks identified in Chapter 2. Different code of conducts should be in place to govern the: a/ Benchmark Administrator; b/ Panel contributors; and c/ Oversight body. Please see below the minimum elements that should be included in the code of conduct: Methodology o Clear criteria of the submission process to ensure quality and integrity of the submitted data;

7 o Clearly defined process and policies which govern the construction of the benchmark; o Transparency of contingency provisions for episodes of market disruption o Transparency over changes to the Methodology; Governance of Submitting Panels and Benchmark Administrator, with clear specification of: o Composition of the body; o Role, responsibility and obligations of the body. Controls required to ensure full transparency o Accountability procedures applicable to the Benchmark Administrator and Submitting Panel; o Specify business practices that may cause conflicts of interest per specific benchmark; o Specification of Oversight Committee responsible to scrutinize the production of the Benchmark; o Record management policies; o Oversight Committee responsible to scrutinize the production of the Benchmark Currently additional measures for potential risks that may arise cannot be foreseen. Question 26: The code of conduct should contain clear definition of the submission criteria, detailed processes, responsibilities and controls. Additional measures will differ per the body for which the code of conduct applies. They should ensure a robust framework for the benchmark overall. Question 27: No, a Self-Regulatory Organization is not seen as a viable alternative. Benchmarks should be governed and published by public institutions. Statutory regulation of benchmarks should be introduced to assure credible independent supervision, oversight and enforcement. Question 28: This will only work if the code of conduct is clear on the requirements to contribute and under the market abuse regulation it is clear described what will be seen as a breach of the regulation. Question 29: For purpose of answering this question we refer to The Wheatley Review of LIBOR: final report, chapter 7. Chapter 4 Data sufficiency Question 30: Yes, a benchmark should be based on actual trade data to avoid subjectivity. Question 31: No, benchmarks should be based on actual trade data to avoid subjectivity. Question 32: Panel banks should only submit contributions when there is actual data. If insufficient actual trade data is available estimated data or extrapolation could be used. The responsibility of extrapolation should be done by the benchmark governing body. A strong governance framework should be in place to point out what submissions are based on actual trade data and what submissions are based on estimation / extrapolation (ING principle 1). In case that actual trade data is unavailable and estimated data is to be used, the Administrator

8 should disclose to the Market Participants clear and transparent parameters to determine the data. The criteria should be clearly communicated to all stakeholders. Question 33: Yes, agree. Question 34: Volumes should be taken into account in the individual submission of participants and in the calculation of the overall fixing. Calculations should be made computing contributions as weighted average of the transactions undertaken for the relevant benchmark. Transition Question 35: A contingency plan should be in place for contracts and other market uses referencing a given Benchmark. Users should ensure that legal documentation relied upon and referencing Benchmarks should also incorporate a contingency plan in the event of market stress. A strong code of conduct, strong governance as well as regulatory oversight can aid Benchmark resiliency during periods of market stress. Those factors together with having harmonized legislation across jurisdictions can assist in mitigating the potential need for market transition. Question 36: The characteristics of the benchmark should take into account an individual basis. Considerations to be incorporated within a living will highly depend on the individual benchmark and the reason to be discontinued. At least the following areas should be considered to be incorporated within a living will considering the individual benchmark: Methodology changes including modification of the number and frequency of submissions; Plans for transition to a new Administrator; Cessation of all Benchmark activity by an Administrator. Question 37: Alternatives for Benchmark replacement should be determined by constructive dialogue between the Administrator, submitters, regulators and any other relevant stakeholder taking into account the interest of benchmark users. Question 38: All factors are relevant and in line with ING principles stated in this document. Question 39: A market transition between Benchmarks would have to be transparent, credible, smooth, and implemented in such a way as to minimize impact to all classes of Market Participants. In order to ensure a smooth transition, at least the involvement of the Administrator, users, Submitters and relevant regulatory authorities should be in place. Considerations to take into account during the transition period where measures may need to be in place: Regulatory structure for Benchmark oversight; Jurisdiction in civil and criminal enforcement authority over the submission, publication and review of the Benchmark; Transparent and clear communication to users of the benchmark that provides with sufficient knowledge to apply the new substitute rate for ongoing market needs. This information will allow users to revise legacy contracts referencing the prior Benchmark with minimal disruption for the parties involved; Sufficient time should be provided to stakeholders to assess impact and take measures that do ensure a minimum disturbance for the benchmark end users.

9 Question 40: The adoption of a new benchmark should be encouraged and not mandated. This will enable an organic development of the transition if it adapts to the need of users. Transition challenges to take into account: Litigation costs Phasing out the current benchmarks High risk of financial instability Question 41: Considerations to be made for legacy contracts which reference a Benchmark in transition: Considerations of balance sheet demands; Instrument risks including counterparty, liquidity, and market risk; Considerations of the level of use by standardized products and derivatives, and provisions made by the respective industry protocols; Considerations of hedging abilities of the related securities and/or derivatives for relevant Market Participants; Considerations of replacement legal, regulatory and accounting structures; Consideration of legacy trades, and how they may be affected by the transition of the market Benchmarks. Contact: Jeroen Groothuis Group Public & Government Affairs T M E jeroen.groothuis@ingbank.com

IOSCO Public Consultation on Financial Benchmarks

February 2013 IOSCO Public Consultation on Financial Benchmarks Reply from NASDAQ OMX The NASDAQ OMX Group, Inc. delivers trading, exchange technology, listings and other public company services and post-trading