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‘Firms are still failing to fully manage benchmark risks’ says the FCA

30 July 2015

Benchmarks have been the subject of some of the most significant and high-profile global enforcement cases yet, including those relating to LIBOR and FX. The industry as a whole is being encouraged to learn lessons from these cases.

With this in mind, over the last year, the FCA has conducted a thematic review to assess the strength of firms’ oversight and controls in relation to financial benchmarks (LIBOR and FX benchmarks were excluded from the scope of this review). The FCA published the feedback from its thematic review on 29 July 2015. Overall, the FCA set out the following six key messages for firms to consider:


#1 You need to ensure that you identify all the activities that constitute a benchmark activity or that could affect a benchmark activity

The FCA found that most firms currently define ‘financial benchmark’ too narrowly; firms should adopt the broader IOSCO definition of ‘financial benchmarks’ (available here (Annex A, page 35)). If your firm is undertaking benchmark remediation programmes, it may need to revisit the scope of these programmes in order to ensure that it has correctly applied the IOSCO definition of ‘financial benchmarks’.


#2 Senior management needs to act quickly

The FCA praised the reaction of senior management within some firms for their focus on conduct issues relating to benchmarks. However, the FCA also found instances where progress made by firms displayed ‘a lack of urgency’.


#3 You need to strengthen your governance and oversight of benchmark activities

A ‘good practice’ identified by the FCA was the implementation of an overarching governance committee structure within firms that monitors the risks posted by benchmark activities. However, the FCA still expressed doubts as to whether cultural changes relating to benchmark activities ‘had penetrated down to desk level’. The FCA wants firms to make ‘it absolutely clear to traders why some of their colleagues [who had engaged in misconduct relating to benchmarks] are no longer employed by the firm’.


#4 You need to continue to identify, raise awareness of and manage conflicts of interest in relation to benchmark activities

The FCA wants firms to conduct regular reviews of processes linked to benchmark activities to identify conflicts of interest. Processes praised by the FCA include:

  • controlled automatic submission systems (which can pick up unusual benchmark submissions before they are submitted),
  • segregation of individuals who submit to, and use, benchmarks, and
  • established conflicts logs for each asset class firms trade in.

However, the FCA also wants more training here. Anyone who has tried to design and deliver a training programme on this topic will know that this task can prove to be challenging in practice.


#5 You should ensure that you establish robust controls and oversight for in-house benchmarks.

Although most press attention relating to benchmarks has focused on external benchmarks, the FCA also considered in-house benchmarks as part of its thematic review. The FCA made it clear that firms should ensure that the same high standards relating to oversight and control of external benchmarks also apply to in-house benchmarks. The FCA highlighted that employees who contribute to the design and production of an in-house benchmark may be conflicted as a result of other economic interests they have linked to the performance or composition of this in-house benchmark.


#6 When exiting benchmark activities, it is essential that you give due consideration to the wider impact of your actions

Regulatory and reputational risks have led to a number of firms withdrawing from being submitters to certain benchmarks. The FCA expressed concerns that firms are not conducting these withdrawals in an orderly way. In some cases, this can have a knock-on effect on the integrity of financial products and contracts which rely on specific benchmarks. If your firm is considering withdrawing from certain benchmarks, careful consideration should be given to the process and relevant stakeholders should be engaged.

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