Draft CTH Bill Would Make Manipulation of Financial Benchmarks An Offence
Thursday 29 June 2017 @ 12.13 p.m. | Corporate & Regulatory
The Federal Government has released a draft of the Corporations Amendment (Financial Benchmarks) Bill 2017, which is part of a package of reforms announced in October 2016 by Treasurer Scott Morrison. The Bill aims to implement a regulatory framework for financial benchmarks in Australia. Administration of financial benchmarks will require a licence and manipulation of these benchmarks will now be an offence.
The Government is currently taking public submissions on the Bill and accompanying explanatory materials. The closing date for comments is 24 July 2017.
Background to the Bill
In a media release issued on October 4 2016 the Treasurer said:
“The Turnbull Government is strengthening financial regulation to better protect Australians from the possible abuse and manipulation of financial benchmarks by banks….
This package will ensure our regulatory regime is as modern and secure as any comparable regime found in equivalent foreign jurisdictions, such as the United Kingdom and the European Union.”
Context of Amendments
The draft Explanatory Memorandum summarises the “context of amendments” in the bill as follows:
1.2 Financial benchmarks are used to determine the pay-out or value of financial products or contracts, or to measure the performance of investment funds.
1.3 The ASX 200 equity index is an example of a financial benchmark used to measure the performance of funds, while the bank bill swap rate (BBSW) (which is used as a reference interest rate for a range of financial products) is an example of a financial benchmark used to determine the pay-out under financial contracts.
1.4 While some benchmarks are calculated by their administrator using regulated and publicly available data (such as equities indexes), others rely on submissions from banks or other market participants (for example, reference interest rates like the London Interbank Offered Rate (LIBOR)).
1.5 Globally there have in recent years been many cases of market misconduct regarding the determination of financial benchmarks (particularly interest rate reference benchmarks such as LIBOR). As of June 2015, penalties paid by financial institutions globally had reached around AUD22 billion. 1.6 In Australia, ASIC commenced formal court proceedings in 2016 against ANZ, NAB, and Westpac for alleged market manipulation and unconscionable conduct in relation to the BBSW. This court case is still ongoing.
The IOSCO Principles
As a response to these events, the International Organization of Securities Commissions (IOSCO) developed a set of principles for the regulation of financial benchmarks. A number of jurisdictions have developed regulatory regimes based on these principles, including the UK, the EU, Japan, Singapore and Canada.
The Explanatory Memorandum says that:
[t]he amendments made by the Bill are based on recommendations made by the Council of Financial Regulators (CFR)1 for reforming the regulation of financial benchmarks in Australia in line with the IOSCO Principles. The CFR's recommendations were formulated following extensive consultation with stakeholders.
Bill Details
The Bill will give ASIC the power to designate significant financial benchmarks in some cases.
The Bill will also establish a licensing regime requiring administrators of “designated significant financial benchmarks” to obtain a “benchmark administrator license”. ASIC will oversee the licenses and may impose conditions on the grant of a licence.
ASIC will also have the power to make rules setting out in detail the requirements that apply to the financial benchmarks that are subject to the licensing regime.
Finally, the bill creates new offences for manipulating financial benchmarks.
For an individual, these offences will be punishable by up to 10 years imprisonment and fines totalling the greater of 4,500 penalty units (currently $810,000) or three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence.
For a body corporate, the fine is the greatest of 45,000 penalty units ($8.1 million), three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence, or 10% of the body corporate’s annual turnover during the 12 month period ending at the time the offence was committed.
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