Chiu, H; (2016) Regulating Financial Benchmarks by 'Proprietisation': A Critical Discussion. Capital Markets Law Journal , 11 (2) pp. 191-227. 10.1093/cmlj/kmw009.

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Abstract

The integrity of price-related financial benchmarks such as the London Inter-bank Offered Rate (LIBOR) and the foreign exchange London WM Reuters 4pm ‘fix’ has suffered in the wake of revelations of manipulative activity carried out by individuals in financial institutions. A regulatory regime has since 2013 been introduced in the UK to oversee LIBOR, and more comprehensive thinking has been developing in relation to regulating financial benchmarks in general.1 This article argues that the regulation of financial benchmarks is very much caught between the desire on policy-makers’ part to preserve market stability, and yet maintain the nature of the financial benchmark as a market good. In the immediate aftermath of benchmark manipulation revelations, it is clear that regulatory response is needed. However, as will be discussed, policy-makers wished to avoid excessive intervention that would ‘publicise’ important benchmarks, and yet create a regulatory regime that would assure of the credibility of financial benchmarks that are produced by the private sector. The ultimate approach taken in the UK legislation is premised upon preserving hitherto trusted benchmarks by allowing them to become ‘proprietised’. These premises also underlie the international framework developed by IOSCO and the European approaches. The ‘proprietisation’ approach essentially allows designated entities to have exclusive rights to develop and exploit the financial benchmark in return for protecting its quality. This is a marketbased approach which preserves hitherto important financial benchmarks, but such preservation is achieved at the price of destroying the original characteristics of the benchmarks. The article fleshes out the features of the UK, EU and IOSCO regulatory regimes that reflect the proprietisation approach and critically engages in its benefits and drawbacks. We argue that the proprietisation approach, heavily underscored by regulatory subsidy, neither delivers optimal characteristics of market-based governance nor effectively addresses key regulatory objectives. We offer some suggestions as to adjustments to the current regulatory frameworks.

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