The Financial Sector Is Concerned About ‘Systemic Risk’ Associated with Benchmark Regulations.

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Financial industry groups have spoken out against new EU laws that would limit the use of financial benchmarks, claiming they represent a systemic danger to the economy and would disrupt markets.

The International Swaps and Derivatives Association is leading the charge of those who oppose a blanket ban on all international benchmarks that don’t meet EU standards.

They advocate for a more nuanced approach, suggesting benchmark bans be implemented on a case-by-case basis.

They issued a statement late Thursday calling the ideas a “source of uncertainty, disruption, competitive disadvantage, and possibly systemic danger.”

Assocations worry that many benchmarks may be outlawed due to the difficulties of receiving EU permission, leaving firms “unable to effectively manage risk and make informed investment choices,” as the associations put it.

Futures and forwards, among other investment contracts, are priced in part by reference to market benchmarks for stocks, currencies, bonds, and other instruments.

Investors utilise these instruments for hedging, converting offshore earnings, and repatriating assets, so cutting off access to them might have far-reaching consequences.

The group also wants to exclude public policy benchmarks like currency rates used to settle non-deliverable futures.

As per the libor response, they stated that unless exempted, nine spot FX benchmarks will be banned.
Over a decade after the first shock of the Libor affair, charges of manipulation of currency and commodities benchmarks prompted the European Union to enact new regulations.

They are meant to eliminate bias and increase openness.

The US SEC is also looking at whether or not index and financial data providers should be subject to strict investor protection requirements.

An EU official stated, “The European Commission has asked stakeholders to submit ideas on a possible improvement of the regulations regulating benchmarks managed outside of the European Economic Area.”

For the purpose of determining the most effective next steps, we will thoroughly examine all input.

International Swaps and Derivatives Association (ISDA), the Futures Industry Association, the Global Foreign Exchange Division of the Global Financial Markets Association, and the European Association of Corporate Treasurers are all part of this coalition of financial trade organisations.

The parent firm of Bloomberg News, Bloomberg LP, produces market standards for many types of investments.

Market growth, according to the industry associations, may be stunted if the EU mandated an ESG standard label.

They contend market participants should be free to select for themselves whether or not to accept a voluntary ESG label. They also noted that benchmarks developed outside of the EU should be considered for ESG certification.

The proposed limits “would possibly constrain capital flows into ESG investments and hence be counterproductive in the EU’s endeavour to accomplish its sustainable finance goals,” they argued.

Source: Bloomberg