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ASIC says tough new benchmark rules needed to restore trust
Australian Financial Review Oct 4 2016 11:45 PM
Jonathan Shapiro
The threat of jail time for traders found guilty of manipulating important financial benchmarks is needed to restore public and international trust in Australia's markets, the corporate watchdog says.
ASIC commissioner Cathie Armour told The Australian Financial Review it was in "the national interest to have a benchmark administered and operated in a way where there are no perceived conflicts of interest".
She said the measures announced by the government, which will hand the corporate regulator more powers to ensure important financial benchmarks are not subject to manipulation, brought Australia into line with other parts of the world.
"It is key that our benchmarks are recognised in global markets," she said.
"The Treasurer is aiming to have the regulatory regime in place when the European regime commences, so we can be confident our key benchmarks are recognised and that counter-parties from that region are permitted to deal in products that use significant Australian benchmarks."
In response to the scandal involving the manipulation of the globally important Libor (London Interbank Offer Rate) benchmark, the European Securities and Markets Authority is set to introduce new regulations to govern benchmarks that come into effect in January 2018. The regulations could prohibit the use of benchmarks that it does not endorse.
New penalties
On Tuesday, Treasurer Morrison unveiled a range of measures aimed at clamping down on manipulation of key benchmarks, such as the bank bill swap rate which is used as a reference rate for billions of dollars of loans and securities.
The measures included the introduction of civil or criminal penalties for manipulating financial benchmarks and the requirement that institutions operating significant benchmarks require a licence from the Australian Securities and Investment Commission.
Financial benchmarks such as the bank bill swap rate are at the centre of one of ASIC's largest ever claims against an Australian institution.
ASIC is suing ANZ Banking Group, National Australia Bank and Westpac Banking Corp for unconscionable conduct and market manipulation over their actions in setting the BBSW rate.
All three banks have vowed to defend themselves against the allegations claiming their traders acted to protect the bank from interest rate moves.
Commonwealth Bank chief Ian Narev told politicians on Tuesday that ASIC is reviewing the bank as part of its investigation into BBSW while the bank's general counsel David Cohen confirmed a number the bank's employees were being interviewed as part of the probe.
Ms Armour said the changes were important to bring Australia in line with other parts of the world. She cited an example of key interest rate swap contracts traded between Australian and foreign banks as being affected by a benchmark framework that is not globally recognised.
The BBSW is among several benchmarks identified by the Council of Financial Regulators as significant. Other benchmarks identified by the Council as "significant" are the ASX/S&P 200 stock market index, bond futures contract settlement prices, the consumer price index and the Reserve Bank cash rate.
Some of these benchmarks are administered by government institutions and would not be subject to licensing requirements.
Royal Commission
The Treasurer's new measures, revealed in The Australian Financial Reviewon Tuesday, were announced as the big four banking chiefs headed to Canberra to front a parliamentary inquiry.
The hearings were touted by Prime Minister Malcolm Turnbull as a means of holding the banks accountable for their actions, through an annual appearance in Canberra.
But Labor politicians have labelled the inquiry as a way to avoid a Royal Commission into banking that they have relentlessly called for since the start of the 2016 election campaign.
Labor MP Matt Thistlethwaite, who sits on the 10-person committee that will conduct the inquiry, described the benchmark measures as "putting the cart before the horse".
"We think what is needed is a Royal Commission into the banks to get to the bottom of what is going on, particularly in respect of selling financial products and insurance," he told ABC radio.
He said Labor was likely to support the measures but would need to see the details.
"Certainly the BBSW is important for the rate at which banks trade with each other and that can affect the market rate, and ultimately mortgages and deposits. So it is something that is important and any manipulation of that can have a detrimental effect on consumers."
The new measures may address the fact that since benchmarks are not technically financial products, it is more difficult to charge alleged offenders of market manipulation.
Legal experts also point out that traders could have faced criminal charges under the current regime.
However, a swath of regulations and penalties aimed at restoring trust in benchmarks has come at a cost, some have suggested.
Officials noted that trading in bank bills has all but evaporated around 10am every day when the BBSW is set, as traders feared being accused of impacting markets.
Avoid risks
Foreign banks have also withdrawn their presence on benchmark panels to avoid the costs and risks associated with the process.
Ms Armour said that financial institutions desired benchmarks that could be trusted and accepted globally, and that banks should support the measures.
"It is really important for all of us that there is a robust benchmark regime and it's essential for financial institutions to be part of that."
The Reserve Bank's deputy governor, Guy Debelle, has led an international process that has engaged with market participants to improve foreign exchange benchmarks.
"These reforms create an international comparable framework, and we think firms should be confident to work within a model framework of processes and procedures," Ms Armour said.
She said the proposals have an opt-in mechanism so benchmark operators can "choose to have benchmarks regulated if they wish, so as to give their investors confidence".