Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Conduct Regulator Evaluates Impact of UK Benchmark Reform Since 2015
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  • UK Conduct Regulator Evaluates Impact of UK Benchmark Reform Since 2015
    10/22/2018
    The U.K. Financial Conduct Authority has published an evaluation paper on the impact of bringing seven additional benchmarks within the U.K.'s regulatory and supervisory perimeter in April 2015, in response to the recommendations of the Fair and Effective Markets Review. The necessary changes to the FCA's Handbook and guidance were effected by the Benchmarks (Amendment) Instrument 2015, a legal instrument made by the FCA. In the evaluation paper, the FCA clarifies that this benchmarks-related evaluation does not cover changes due to other policies that affect benchmarks, such as the EU Benchmarks Regulation or principles set by EU or international bodies.

    The evaluation has been conducted in line with the FCA's approach to ex-post evaluation of the impact of its work, which it outlined in a discussion paper in April 2018. The FCA has conducted the benchmarks-related evaluation to understand: (i) the impact of the Benchmarks (Amendment) Instrument 2015 on markets and firms' costs; and (ii) whether the FCA's regulatory intervention met its objective of increasing the robustness of benchmarks and restoring market confidence.

    The evaluation paper describes the FCA's approach to the evaluation, including its scope, methodology and expected outcomes. The key findings were that:
    • benchmark integrity has improved and there may have also been potential positive side-effects on the integrity of non-regulated benchmarks due to firms' extension of controls to them as well as to regulated benchmarks;
    • the intervention seems to have been beneficial for already liquid markets (especially swap markets) but, for less liquid markets, the perceived increase in regulatory risk may have changed traders' behavior and contributed to a further reduction in the liquidity observed; and
    • the incremental costs due to the FCA's regulation of the additional benchmarks was in line with its estimates.

    The FCA will apply the lessons learned from the evaluation to its current and future work.

    View the evaluation paper.

    View details of the FCA's April 2018 Discussion Paper.

    View the recommendations of the Fair and Effective Markets Review.

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