What does the proposed regulatory framework for financial benchmark mean for Singapore banks?

20 banks punished over rate rigging.

The Monetary Authority of Singapore (MAS) on June 14 has announced that it had punished 20 banks in Singapore over benchmark manipulation. It's year-long probe found that 133 currency traders at those banks had attempted to manipulate Singapore’s interbank lending rate (SIBOR) and two other foreign exchange benchmarks from 2007 to 2011.

In line with this, MAS has released a consultation paper for a new regulatory framework for the setting of financial benchmark interest and exchange rates.

According to key Allen & Gleddhill, the following are the key features of the proposed framework:

- Manipulation of any financial benchmark will constitute a market misconduct offence that attracts criminal or civil penal;ty sanctions
- The Mas proposes to designate the following as "designated benchmarks": SIBOR; Swap OFfer Rate (SOR); foreign exchange spot benchmarks (FX Benchmarks).
-All entities involved in carrying out the activities of "administering a designated benchmark" will be required to be licensed by the MAS (the Administrators')
-Any entity that carries out the activity of providing or transmitting information or expressions of opinion to an Administrator, or to another entity which transmits such information to the Administrator in connection with a designated benchmark will be licensed by the MAS as"submitters".

Here's legal experts take on the implications going forward:

Eric Chan, Drew Napier

In the light of the global scandal concerning financial benchmarks, which continues to unfold, the measures proposed by MAS should be welcome to help reassure financial markets of the credibility and reliability of financial benchmarks. Plainly the existing system is flawed in permitting traders working in the participating banks to engage in the behaviour that has now come to light.

Significantly, one impact of the new measures, should they be implemented in the form proposed in the consultation paper, is that the Association of Banks in Singapore, which has traditionally been an association body rather than an operating entity, would come under MAS regulation in its capacity as administrator for SIBOR, SOR and the NDF FX Rates.

Jeremy Hewitt, RPC

The “rigging” of interbank borrowing rates, particularly LIBOR, has generated considerable attention in the worldwide media although, to date, it has not developed into a significant (let alone systemic) “claims” event for E&O or D&O insurers in any Asian jurisdiction. It is doubtful whether the MAS investigation into SIBOR, and the sanctions imposed on the banks, will change that notwithstanding the sums it has ordered the banks concerned to deposit are huge.

First, the MAS will be returning the sums deposited by each bank once it is satisfied that their internal controls and procedures have been improved sufficiently so as to prevent any future instances of manipulation of benchmarks. In the meantime, each bank will have to submit a report to the MAS every three months explaining the measures it has taken to strengthen its internal controls.

Therefore, the only financial “penalty” being imposed on the banks (at this stage) is the interest they will forfeit on the sums they deposit with the MAS; irrespective of currency, interest rates on deposits in Singapore (like elsewhere) are extremely low, often less than 1%, which (in effect) reduces the loss to the banks significantly.

Second, for now, it is hard to see the deposits (and associated loss of interest) as anything other than a regulatory penalty, which is usually carved out of the definition of “Loss” and/or specifically excluded from coverage under banks’ E&O Policies.

Third, at this stage, we do not anticipate the MAS investigation leading to civil claims in Singapore against those banks implicated in the scandal.

Going forward, increased regulation of financial institutions is clearly on the way in Singapore. The MAS has stated that it will be introducing “new criminal and civil sanctions for manipulation of any financial benchmark”, although it has not yet said what those sanctions will be. The MAS has also stated that it will “subject the setting of key financial benchmarks to regulatory oversight”, although, again, it has not yet specified the nature of this oversight or the potential penalties for breaches.

Banks and their insurers should, therefore, watch this space for further announcements and brace themselves for insureds’ increased exposure to regulatory investigations in the meantime.

A further, bigger, issue which banks and their insurers should watch is whether the regulators in Hong Kong, and elsewhere in the world, follow suit. Regulators in Hong Kong, in particular, are flexing some muscle across a wide range of regulatory issues at the moment.