IOSCO published a statement setting out matters for users of financial benchmarks (benchmarks) to consider in selecting an appropriate benchmark and in contingency planning, particularly for scenarios in which a benchmark is no longer available.
It is intended to help inform benchmark users and to complement existing IOSCO Principles.
First, there are matters related to assessing the appropriateness of a benchmark, in both its initial selection and ongoing use. Second, there are matters related to contingency planning, such as if the selected benchmark becomes unavailable. In both cases, the statement recognises users’ reliance on benchmarks, aims to increase awareness of the risks involved and encourages their mitigation, where appropriate.
The statement recognizes that, in many instances, users of benchmarks may not be able to provide any input to the characteristics of a benchmark or the terms of existing financial instruments which reference them. In cases where a benchmark is used in a contract between a financial firm and a retail client, for example, the retail client is likely to have little ability to change contractual terms. The financial firm is likely to have responsibilities towards that client. In considering the matters set out in the statement, it would also therefore be appropriate for the financial firm to consider its client’s interests in a manner consistent with those responsibilities.
Examples of relevant considerations of appropriateness for a user could be, to the extent they are applicable:
The considerations may vary depending on the circumstances, including the characteristics of the user and the types of contract or financial instrument referencing the benchmark. Users are encouraged to assess the relevant considerations not only on the initial selection of a benchmark, but periodically on an ongoing basis, as circumstances indicate.
The existence and operation of robust fall back provisions could help protect the users (and their clients, as applicable) against the risks of relying on a particular benchmark. They may help reduce or prevent
potential wider market disruption. More specifically, if a permanent discontinuation of an IBOR or other benchmark occurs, the fall back provisions would need to be robust enough to prevent potentially
serious disruption to markets and market participants (including users and their clients), and to safeguard the continuity of contracts, as a result.