Review The Article 'The Future Of Financial Benchmarks' ✓ Solved

Review the article 'The Future of Financial Benchmarks' and

Review the article 'The Future of Financial Benchmarks' and one additional source. Based on these sources, discuss the future of benchmarking by answering: 1. How will the IOSCO Principles affect benchmarks used today? 2. Will these principles eliminate current-use benchmarks? 3. Should benchmarking be eliminated? 4. Give an example of a benchmark used in your profession. Include a paraphrased statement or direct quotation and provide an in-text citation and a full reference for the additional source.

Paper For Above Instructions

Introduction

Financial benchmarks underpin pricing, risk management and contractual settlement across markets. The unit article "The Future of Financial Benchmarks" outlines regulatory developments, market pressures and the IOSCO Principles aimed at restoring benchmark integrity after high-profile manipulation scandals ("The Future of Financial Benchmarks," 2013). This paper synthesizes the article and the IOSCO Principles (IOSCO, 2013) to answer four questions about the future of benchmarking.

1. How will the IOSCO Principles affect benchmarks used today?

The IOSCO Principles introduce governance, transparency and methodological standards that will reshape how benchmark administrators operate and how market participants rely on benchmark outputs. Specifically, the Principles require administrators to implement clear governance frameworks, identify single-point accountability, publish control frameworks, and disclose conflicts of interest (IOSCO, 2013). Practically, this will lead to: (a) tighter internal controls and audit trails within benchmark administrators; (b) formalized roles and responsibilities so users know who is accountable for benchmark reliability; and (c) improved transparency on methodology and data inputs, although full disclosure of proprietary data is not mandated.

By emphasizing that benchmarks should be "anchored by observable transactions entered into at arm's length" (IOSCO, 2013), the Principles encourage greater reliance on transaction-based inputs where possible, and explicit methodologies where markets are thin. Benchmark administrators will therefore redesign input hierarchies, seek more transactional data, and document fallback procedures for days when transactions are insufficient. Regulators and end-users can expect clearer documentation, regular assurance reviews, and stronger surveillance to detect anomalous submissions (Financial Stability Board, 2014; EU Commission, 2013).

2. Will these principles eliminate current-use benchmarks?

The IOSCO Principles are unlikely to eliminate existing benchmarks wholesale. Instead they will force a process of adaptation and, in some cases, replacement. Benchmarks that can be adapted to meet governance and transparency standards—by improving data collection, altering calculation methodologies, and increasing oversight—will survive and likely gain credibility. Conversely, benchmarks that are inherently opaque, rely heavily on subjective inputs, or lack a viable transactional basis may become obsolete or face regulatory constraints that restrict their use (The Future of Financial Benchmarks, 2013; FSB, 2014).

Additionally, regulatory regimes (for example the EU Benchmark Regulation) may restrict which benchmarks regulated firms can use, favoring authorized administrators and recognized third-country providers (European Commission, 2013). That can lead to fragmentation: some legacy benchmarks may persist in unregulated or niche contracts, while mainstream financial markets migrate to regulated, transaction-anchored alternatives. Thus the Principles will not produce universal elimination; they will accelerate the retirement of vulnerable benchmarks and catalyze the development of compliant successors.

3. Should benchmarking be eliminated?

No. Eliminating benchmarking altogether would undermine market efficiency, contractual clarity, and risk-management practices. Benchmarks provide standardized reference points that enable price discovery, hedging, valuation and comparability. Rather than elimination, the objective should be reform: strengthen governance, improve data quality, and design robust fallback arrangements. The unit article notes that the systemic issues arise from the widespread use and economic importance of benchmarks; reforming them preserves their benefits while addressing integrity risks ("The Future of Financial Benchmarks," 2013).

Well-governed benchmarks increase market confidence and reduce transaction costs. For example, a transparent interest-rate benchmark with observable transaction inputs supports fair contract settlement and reduces litigation risk. Eliminating benchmarking would force bespoke pricing for many contracts, increasing complexity and undermining liquidity. Therefore, regulators and market participants should focus on improving benchmark resilience and accountability rather than discarding benchmarks as a tool.

4. Example of a benchmark in my profession

In financial markets and treasury operations, a common benchmark is the LIBOR (London Interbank Offered Rate) historically used as the reference for floating-rate contracts. After manipulation scandals, market participants shifted to alternative reference rates such as SONIA (Sterling Overnight Index Average) in the UK and SOFR (Secured Overnight Financing Rate) in the US, which are transaction-based benchmarks (Bank of England, 2014; Federal Reserve, 2018). The IOSCO Principles explicitly promote anchoring benchmarks to observable transactions, and so the move from LIBOR-style contributor-based submissions toward SONIA/SOFR-style transaction rates exemplifies how principles shape practical change. As IOSCO states, benchmarks should be "anchored by observable transactions entered into at arm's length" (IOSCO, 2013), which underscores why transaction-based alternatives have grown in use.

Implementation and Practical Considerations

Operationalizing the Principles requires investment in data collection, compliance and governance. Administrators must build or acquire datasets, strengthen surveillance systems and provide sufficient methodological detail to enable auditability without unnecessarily exposing proprietary inputs. Market users must renegotiate contracts to include fallback provisions and transition plans. Regulators will need to balance transparency with protection of commercial confidentiality to avoid chilling data-sharing required for robust, transaction-anchored benchmarks (CFTC, 2014; Platts, 2014).

There will also be transitional frictions: contract renegotiation, legal uncertainty across jurisdictions, and potential benchmark fragmentation. National regulators may prefer benchmarks under their supervision, possibly creating regional differences. Firms with international contracts will therefore need governance processes to manage multi-jurisdictional benchmark risk (The Future of Financial Benchmarks, 2013).

Conclusion

The IOSCO Principles will materially change benchmark governance and methodology, encouraging transparency and transaction anchoring but not extinguishing benchmarks. Some legacy benchmarks will be retired or restricted; others will adapt and thrive under higher standards. Eliminating benchmarking is neither desirable nor practical; reform is the prudent path. Practitioners must engage proactively—improving data practices, negotiating robust fallback terms, and choosing benchmarks that meet evolving regulatory expectations to preserve market efficiency and trust.

Direct quotation used: IOSCO's characterization that benchmarks should be "anchored by observable transactions entered into at arm's length" (IOSCO, 2013).

References

  • The Future of Financial Benchmarks. (2013). Unit article provided for the assignment.
  • IOSCO. (2013). Principles for Financial Benchmarks. International Organization of Securities Commissions. Retrieved from https://www.iosco.org
  • Financial Stability Board. (2014). Reforming Major Interest Rate Benchmarks. FSB Report. Retrieved from https://www.fsb.org
  • European Commission. (2013). Proposal for a Regulation on Indices used as benchmarks in financial instruments and financial contracts. European Commission Document.
  • Bank of England. (2014). Transition from LIBOR to SONIA: Overview and recommendations. Bank of England Consultation Paper.
  • Commodity Futures Trading Commission (CFTC). (2014). Statement on Benchmark Integrity and Reliability. U.S. CFTC Release.
  • Platts (S&P Global). (2014). Assurance review and compliance with IOSCO Principles for Oil Price Reporting Agencies. S&P Global Platts report.
  • Bank for International Settlements (BIS). (2014). The Governance of Benchmarks: Recent Developments. BIS Working Paper.
  • Hull, J. C. (2015). Risk Management and Financial Institutions (4th ed.). Wiley. (Textbook discussing benchmarks, derivatives and risk management practices.)
  • Federal Reserve Bank. (2018). The Transition from LIBOR to SOFR: Considerations for Market Participants. Federal Reserve Publication.

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