How do benchmark submissions in New York and London affect the cost of doing business for a rickshaw driver in Mumbai?
The recent wave of global benchmark investigations has brought attention to submitting institutions, but its implications spread much farther. For years, regulators have relied on benchmark data for a full range of financial and economic policy decisions.
Major financial benchmarks have served as barometers of market activity that impact not only transactions between financial institutions and direct counterparties, but also a wider range of downstream market participants and end users. Lenders, borrowers, industrial producers, importers, and exporters of all shapes and sizes, from major financial centers to informal economies are affected. This includes the rickshaw driver in the example above, whose costs of fuel are driven in part by FX benchmark rates that influence fuel import costs that are ultimately passed on to end users.
The butterfly effect of LIBOR and FX scandals
The potential cascades of affected transactions described above – illustrating what has historically been regarded as the “butterfly” or “domino” effects in finance and economic theory – leave little doubt as to the main impetus driving global regulatory reform over benchmark submission and administration practices.
Policymakers have focused on maintaining market integrity through stronger deterrents against potential market abuse and by mandating greater oversight of submitting business units. Given the far-reaching potential impact of inaccurate or incomplete benchmark data, it is unsurprising that regulators and self-regulatory organizations in nearly every major jurisdiction have implemented or are seeking to implement extensive reform.
The two major emphases of the benchmark regulations have been on:
- Mandating more proactive supervision over submission activities through ongoing monitoring and surveillance of communications and trade data
- Imposing more comprehensive record retention requirements to help facilitate responses to regulatory requests for information
From a practical standpoint, these have presented yet another series of big data challenges.
The impact of regulatory reform and compliance on benchmarking data
Indications are that regulatory scrutiny of this area is unlikely to abate in the immediate term. There are concerns, however, that the costs of regulatory compliance and potential enforcement may cause firms to evaluate the viability of continuing submitting operations, and in certain instances these factors have already compelled some firms to attempt to exit submission activities.
Regulators and market participants have further expressed concerns that submitter exits could ultimately lead to benchmarks that reflect insufficient cross sections of relevant market activity, and in turn “tip the dominoes” again by resulting in cascades of downstream transactions driven by incomplete benchmark data. Reform efforts will continue to be watched closely given the range and scale of global markets in which benchmarks play a central role.
Information governance reform for benchmark submitters
Submitting business units are largely global institutions that generate massive volumes of data to review, and the tasks of managing them and extracting relevant information are considerable.
FinTech solutions have in turn been marketed as progressive applications that can help better structure underlying data, such as advanced storage, search and cognitive capabilities that apply to email, instant messaging, voice and trade data.
Early lessons from the benchmark space highlight the use of certain base technology functionalities such as secure storage and search. But more forward-thinking firms have also evaluated advanced cognitive platforms, designed to help streamline reviews of email, chat and voice data.
Optimal utilization of both basic and advancing technologies, however, requires specialist expertise that goes beyond the generalist resources that may be deployed in this area.
“Turnkey” solutions that fully automate surveillance and review processes simply do not exist.
Every business unit environment is unique, and deployment of applications into those environments will require different types of resource allocations in order to tailor technology outputs to meet business demands.
Sell-side and buy-side firms would do well to develop an understanding of investigative priorities and workflows required to meet their specifi c risk management objectives.
Download our white paper for an in-depth look at what this means for market participants including:
- How market participants must manage conduct risk in their own benchmark submission processes
- The communications data retention obligations for benchmark submitters in a post-scandal world
- Practical challenges and implications of ongoing regulatory compliance, including optimizing FinTech investments to help meet risk management objectives
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