On 22 October 2018, the FCA published Evaluation Paper 18/2: the impact of bringing additional benchmarks into the regulatory and supervisory regime (EP18/2). EP18/2 examines the impact of the Benchmarks (Amendment) Instrument 2015 (Benchmarks Instrument), which brought in additional benchmarks into the regulatory and supervisory regime. Seven benchmarks were introduced in 2015 following recommendations from the Fair and Effective Markets review:

• Sterling Overnight Index Average (SONIA);
• Repurchase Overnight Index Average (RONIA);
• International Currency Exchange (ICE) Swap Rate (formerly ISDAFIX);
• World Markets/Reuters (WM/R) London 4pm Closing Spot Rate;
• London Bullion Market Association (LBMA) Gold Price;
• LBMA Silver Price; and
• ICE Brent Index.

The resulting Benchmarks Instrument aimed to boost the robustness of these benchmarks by requiring benchmark administrators to: (i) become a regulated entity; (ii) implement governance and oversight measures; (iii) have record keeping and monitoring arrangements for data and information used; and (iv) maintain sufficient financial resources.

EP18/2 finds that the Benchmarks Instrument has had a positive impact on improving the robustness of benchmarks. However, for less liquid markets, the perceived increase in regulatory risk may have contributed to a further reduction of the liquidity observed. This regulatory risk was driven by the added effect of fines, methodology changes, and FCA regulatory change.

In the swap market, benchmark representativeness improved by 12% – 68% (depending on time interval), with liquidity improving by 11% – 14%. A negligible impact was seen in the forex market and its benchmark.

The FCA notes two key lessons learned from EP18/2:

• whilst regulatory change can boost robustness (making manipulation harder) it can also make it more difficult for investors to attain the benchmark; and
• regulatory risk may lead to unintended consequences, especially in markets with low liquidity and participation.