National Treasury has published draft regulations that will make the provision of a benchmark a financial service that will regulated and supervised by the FSCA.
“The integrity of benchmarks is critical for the pricing of many financial instruments, and the management of financial risk. Doubts regarding the accuracy and integrity of benchmarks may undermine financial confidence, cause significant losses to financial customers, and distort the economy. It is, therefore, essential to ensure the integrity of benchmarks and the benchmark setting process,” National Treasury said in a statement.
“Concerns about the integrity and reliability of benchmarks have prompted a number of regulatory reform initiatives internationally, including the IOSCO Principles for benchmarks in financial markets of 2013, work by the Financial Stability Board on globally significant interest rate and foreign exchange benchmarks, and the EU benchmark regulations (BMR). In terms of the BMR, non-EU benchmarks may only be used in the EU if the benchmark is qualified under an equivalent third-country regime. The BMR came into operation on 1 January 2018, and benchmark administrators domiciled in non-EU jurisdictions must be compliant with the BMR by 1 January 2022. In order for South Africa to qualify as an equivalent third-country regime, a regulatory framework for the provision of benchmarks must be established,” according to Treasury.
It said the regulations were not intended to directly regulate the South African Reserve Bank in relation to its role as the administrator of the Sabor and the Jibar, as international standards set by the BMR do not typically extend to central banks.
The “Designation of Benchmarks Regulations”, published in terms of the Financial Sector Regulation Act, propose that no one may provide a benchmark, “as a business or a part of a business”, without a licence from the FSCA, although the regulator may exclude specific benchmark providers from this requirement.
In terms of section 1 of the Act, ‘‘provision of a benchmark’’ includes “administering the arrangements for determining a benchmark; collecting, analysing or processing input data for the purpose of determining a benchmark; and determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose”.
This section also defines a benchmark and an index.
The regulations will grant the FSCA the power to, among other things, specify the foreign benchmarks that must be approved by the authority before they can be used in South Africa.
The FSCA will have to establish and maintain a list of what the regulations call “critical benchmarks” provided by benchmark administrators in South Africa. The list must be reviewed at least every two years to determine whether the benchmarks still comply with the criteria for being listed “critical benchmarks”. The regulations neither define a “critical benchmark” nor state the criteria.
Jeannine Bednar-Giyose, the director of fiscal and intergovernmental legislation at National Treasury, said the FSCA will set out, in a draft conduct standard, what constitutes a critical benchmark and the criteria that will be used to determine whether a benchmark is critical.
The regulations detail the procedures that must followed if the administrator of a critical benchmark decides it wants to cease publishing the benchmark.
The FSCA will be empowered to require the mandatory administration of a critical benchmark, to ensure its continued provision, if ceasing the administration of the benchmark could render financial contracts or financial instruments invalid, cause losses to consumers or investors, or impact financial stability.
Written comments on the draft regulations should be sent to commentdraftlegislation@treasury.gov.za by the close of business on 13 October. Requests for clarification can be emailed to Jeannine.Bednar-Giyose@treasury.gov.za.
