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Dear CEO | Release Date: 28th January 2020

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

As part of our comprehensive Approach to Supervision, the Financial Conduct Authority (FCA) systematically categorises firms into specific ‘portfolios’ based on their primary business activities. This methodology allows us to tailor our supervisory approaches more effectively, addressing the unique aspects and potential risks of different sectors. Your firm has been classified under the ‘benchmarks’ portfolio due to your significant activities in benchmark administration. This placement not only reflects your firm’s core functions but also aligns with our goal to oversee and regulate firms more efficiently.

This strategic letter delineates our perception of potential risks that benchmark administrators could pose to consumers and the financial markets they operate within. It also outlines our expectations from your firm in mitigating these risks and maintaining compliance with regulatory standards. We aim to ensure you fully understand the scope and nature of these risks, facilitating better governance and operational practices within your firm.

Detailed Overview of Potential Harms and Key Risk Drivers

1. Quality of Benchmarks:

Potential Risks: Customers may be subjected to benchmarks of sub-standard quality, which can stem from calculation errors, manipulation, or inadequate benchmark design. Such deficiencies could mislead consumers or distort market operations.

Underlying Causes: These risks may arise from several deficiencies within your firm’s operational structure, including:

2. Operational Disruptions:

Potential Risks: The market could experience significant disruptions from poorly managed cessation or recalibration of benchmarks. Such disruptions are particularly impactful where users lack clarity on the procedures for benchmark cessation or recalibration.

Underlying Causes: These disruptions often stem from:

3. Excessive Fees and Charges:

Potential Risks: Customers could face excessively high fees and charges, which can arise from the monopolistic positioning of established benchmarks, complex licensing arrangements, and the high costs associated with switching benchmarks.

Underlying Causes: This situation can be exacerbated by:

Governance and Controls: We expect your firm to maintain a rigorous review cycle for your governance and control mechanisms. This includes ensuring that all processes related to benchmark administration are transparent and adhere to the highest standards of accuracy and integrity.

Strengthening Operational Resilience:

Third-Party Outsourcing: Effective management of third-party relationships is crucial. We expect clear contractual arrangements and contingency plans to be in place, ensuring that outsourced functions do not compromise the integrity of your benchmark services.

Addressing Conflicts of Interest:

Management of Conflicts: It is vital that your firm identifies all potential conflicts of interest and has robust processes to manage and mitigate them effectively. This includes transparent procedures for the creation and management of ‘Best Buy’ lists and other advisory services.

Regulatory Expectations and Compliance

Senior Managers & Certification Regime (SM&CR): This regime enhances accountability within firms. We expect clear accountability and compliance with the SM&CR, ensuring that senior managers fully understand their responsibilities.

EU Withdrawal Preparedness: With the transition period post-Brexit coming to an end, your firm must assess and prepare for the potential impacts on your operations and regulatory obligations.

LIBOR Transition: We urge you to prepare for the cessation of LIBOR and transition to alternative rates, ensuring all your benchmark-related activities are adjusted and compliant with the new standards.

Conclusion and Next Steps

We expect your firm to proactively engage with these guidelines and implement necessary measures to mitigate the identified risks. Our ongoing supervision will include reviews, audits, and possibly direct engagements to ensure compliance. Non-compliance or failure to adequately address these concerns may lead to regulatory actions.

Please ensure that your firm’s senior management is fully engaged with these requirements and that all operational and strategic plans are aligned with our regulatory expectations. If you have any questions or require clarification, do not hesitate to contact your designated FCA supervisor.

We appreciate your cooperation and commitment to upholding high standards in financial benchmark administration and look forward to your continued compliance and engagement.

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