Supporting benchmark administrators in a heightened regulatory environment

This article is part of a series examining the key themes from the FCA’s Regulatory Priorities, Wholesale Markets report. The report sets out the regulator’s view of the risks, opportunities and priorities shaping their approach in the year ahead for brokers, exchanges, benchmark providers and other firms in this space.

The FCA has made clear its supervisory priorities for Benchmark Administrators in its recent Wholesale Markets Regulatory Priorities paper. The FCA flagged that supervision of benchmarks is focused on:

• Governance – the FCA notes that the end product is linked closely to the governance framework that underpins the benchmark lifecycle and will be scrutinising arrangements accordingly; a particular concern is the threat to benchmark integrity posed by certain conflicts of interest, with the FCA flagging ‘issuer pays’ arrangements specifically

• Data quality – the FCA is concerned about weaknesses in the onboarding of providers and control weaknesses in the critical areas of calculation and rebalancing

• Transparency – the FCA wants administrators to make it straightforward for users to understand the benchmarks they use, particularly the underlying methodology used

At the centre of the FCA’s thinking on the above points is the systemic threat to market confidence posed by failures in this sphere. Importantly, references to sustainability and carbon disclosures suggest that the industry should not be thinking about this risk in just the pure macroeconomic sense. Undermining confidence in a particular segment of the financial markets, like sustainable investing, would likely be considered a grave matter.

We detail below our view on how firms should respond to this publication of the FCA, which essentially amounts to the Regulator showing its cards to any firm willing to look. In the above-mentioned wholesale publication, the FCA reinforces that strong governance, effective oversight and robust risk management are not simply compliance requirements but essential foundations of market integrity. The Ocorian team has a portfolio of work in this sphere that covers major markets players and more specialist boutique providers and we have written this piece with a view to helping all such firms to respond appropriately.
 

Effective governance and oversight

For benchmark administrators, governance and oversight are the primary guardians of trust. Reflecting the reality that deficiencies in governance can directly impact market confidence and amplify systemic risk, both the UK Benchmarks Regulation and the IOSCO Principles are built on a clear premise: benchmark integrity depends on clear accountability, independence and effective oversight, not solely on technical compliance.

Achieving this is not straightforward: many governance frameworks struggle to move from looking elegant on paper to performing in practice.

A recurring challenge we observe is a lack of clarity around how different elements of the governance framework, such as committees and oversight functions, interact to provide effective end‑to‑end oversight of benchmark activities. Firms often struggle to clearly evidence oversight and challenge within committees, or to delineate where one committee or function’s responsibility ends and another’s begins. Benchmarks are complex and often require specialists in different parts of the process working together, which renders it essential that you know who has responsibility for each of the parts and, critically, who oversees the collective effort. Your ultimate goal is to never need the phrase ‘I thought that was their job’ when the FCA visits.

A critical first step in addressing this challenge is clearly defining and documenting roles and responsibilities across all governance forums and committees. Do this holistically – complementing the minutiae of terms of reference with the, to use the terrible consulting jargon, high-level overview. Is it clear where each key responsibility sits and is there clarity around how different people or groups communicate with each other? Naturally, firms should not forget the essential hygiene of keeping up to date, robust terms of reference, and keeping meeting minutes that show real, informed challenge.

Governance and oversight must also extend across the entire benchmark ecosystem, including contributors and third‑party service providers. This typically includes clearly articulated contributor codes of conduct aligned to benchmark methodologies, defined senior‑level escalation routes, ongoing due diligence and performance monitoring of critical suppliers, and credible exit or substitution plans. Unmanaged third‑party dependencies can rapidly become points of failure, particularly during periods of market stress or operational disruption. Crucially, if a dependency is inherent – the third party is standalone in its services and there is no backup option – make sure to acknowledge this and do what is in your gift; you might, for example, lower thresholds for KPIs to trigger escalation, giving you extra time to work with users and the FCA to manage the potential harm.

A further challenge is that conflicts are often perceived to be inherent in benchmark administration, whether arising from commercial relationships, links to trading and investment activities, or other related arrangements. The hallmark of good governance is not the absence of conflicts, but the strength of the framework used to identify, assess, manage and escalate them. Benchmark-specific conflict policies, appropriate functional separation and genuinely independent oversight committees with real authority are essential to preserving benchmark independence and credibility. While most firms maintain a conflicts register, effective registers distinguish themselves through the level of granularity provided, which includes documenting how conflicts might crystallise, their potential impact, and the mitigating arrangements in place.

Risk management

Alignment with FCA expectations in the priority areas of data quality and transparency relies on effective risk management. You have read the rules and designed a framework to comply, but have you considered what might undermine your framework and planned accordingly? And do you revisit this exercise with appropriate frequency? Given the complexity of operations, for benchmark administrators, effective risk management must be holistic, encompassing data integrity, methodological judgement, operational resilience and conduct risk across the full benchmark lifecycle.

At the core of the framework sits data and methodology risk management. The credibility of a benchmark depends fundamentally on the quality, representativeness, and transparency of its inputs and calculation methodologies. Administrators must invest in robust end‑to‑end controls, including validation and reconciliation controls at each stage of the benchmark lifecycle, clear hierarchies of data sources, and disciplined rules around the use of expert judgement.

Critical to the efficacy of these arrangements is the quality of a firm’s underlying risk and control framework. The risks in each facet of the framework need to be properly understood, with such an understanding acting as the foundation for control design. Good practice assessments are supported by evidence‑based control assessments, feedback loops with incident management protocol and business-wide cooperation. Strong first‑line ownership is essential, with senior managers accountable for their risk areas, while second‑line functions provide independent challenge and oversight. Furthermore, these assessments should be dynamic, refreshed in response to methodology changes, incidents, audit findings, or shifts in market or regulatory expectations. When embedded effectively, they provide boards and oversight committees with a clear view of the firm’s risk profile, support informed decision‑making, and demonstrate good governance to the FCA.
 

How we can help

Ocorian consulting offers:

• Subject matter expertise on the UK BMR and IOSCO standards, alongside a strong understanding of corporate governance
• Risk and control expertise, with our team helping Benchmark Administrators to complete their risk and control review, and to implement enhanced controls
• IOSCO assurance, enabling firms to demonstrate compliance with these global standards

Our experience enables us to support firms in strengthening their governance and risk management frameworks in a manner that keeps them compliant and commercial.

To explore where your frameworks stand across these areas, contact our team.

Eoghan Hartigan
Chloe Arnold-Martin
Monica Rodriguez