Baltic Exchange Ltd in Response to the IOSCO Consultation Report on Financial Benchmarks
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Public Comment on Financial Benchmarks Provided by The Baltic Exchange Ltd in response to the IOSCO Consultation Report on Financial Benchmarks. Contact at The Baltic Exchange Jeremy Penn, Chief Executive: [email protected]; Tel : 0207 369 1621 1. Do you agree with the scope of the report and intended audience? Are there other Benchmarks or stakeholders that have idiosyncrasies that should place them outside of the scope of the report? Please describe each Benchmark or stakeholder and the idiosyncrasies that you identify and the reasons why in your view the Benchmark or stakeholder should be placed outside of the scope of the report. The scope of the report and the intended audience are appropriate. While is it not suggested that Shipping Market benchmarks such as those produced by the Baltic Exchange should be excluded from the review, it is important that the different characteristics of each market should be fully understood, especially if any eventual regulatory regime is highly prescriptive. 2. Do you agree that the design of a Benchmark should clearly reflect the key characteristics of the underlying interest it seeks to measure? Yes. Baltic Exchange market benchmarks are specifically designed to reflect the lack of (what might generally be considered) liquidity and the highly non-standardised nature of the international bulk shipping markets. 3. What measures should Administrators take to ensure the integrity of information used in Benchmark-setting and that the data is bona fide? Please highlight any additional measures required where Benchmarks are survey based. Please also comment on each of the factors identified in the discussion on the vulnerability of data inputs such as voluntary submission, and discretion exercised by Administrators. Are these measures adequately reflected in the discussion of roles and responsibilities of the Administrator discussed in section E? 4. What measures should Submitters implement to ensure the integrity of information provided to Administrators? Are these measures adequately reflected in the discussion of a code of conduct for Submitters discussed in section E? In particular, should Submitters submit all input data, and not a selection of such data so as to maximise the representation of the underlying market? Please comment on any practical issues that compliance with such an approach may give rise to. [Both questions answered together] Baltic benchmarks rely on voluntary submission. However, this must be distinguished from sporadic submission. If a market participant were able to provide information on an ad hoc basis then this would potentially lend itself to abuse. In the case of Baltic benchmarks once a (competitive, commission-earning) broker has been appointed to the panel of Submitters for a particular route then he must contribute a rate every day. However, the submission of rates does represent a significant burden on brokers and there is a concern that the imposition of overly onerous demands and (especially) penalties by regulators might act as a serious disincentive to submit rates. It is difficult to see how it can be made compulsory for otherwise unregulated entities such as shipbrokers to submit rates and how the Benchmark Administrator would exercise any putative right to impose such a requirement. The Baltic agrees that Administrators should provide procedures and policies governing submission discipline and currently does so via its publication entitled the Manual for Panellists. The Baltic does not consider it appropriate for the Administrator to exercise discretion over the selection of inputs. Once a panel is appointed all inputs should be routinely used. If not then the Administrator is at risk of "managing" the outcome of the process. We do not offer a view on other markets but are keen to emphasise that Baltic panel members are always competitive shipbrokers who do not have any investment in the market. They are required to comply with the Baltic Code of Conduct (being members of the Baltic Exchange) and to be cognisant of the demand of the Manual for Panellists. Since they do not have a direct financial interest in the market conflict of interest is minimised. While submissions are never selected by the Baltic, there is a review process where submissions are considered by an internal team and possible or obvious error can be highlighted. In this event panellists are contacted and a discussion held with them as to the appropriateness of the rate they have provided. The Baltic never insists that a rate is changed. This process is important since the rates are of necessity based only on market expert estimates. We therefore at times need to be able to confirm the panellist (submitter) has considered all appropriate factors and correctly interpreted the route definition contained in the Manual for Panellists. Although the names of panellists are public (by category of ship rather than individual route), the Baltic keeps all submitted rates confidential. We consider this appropriate to protect panellists from any attempt at influencing them. From long experience the Baltic some time ago abandoned the practice of removing the high and low submissions from the rates provided and moved to production based on an average of all data points. This is especially appropriate where expert views on relatively illiquid markets are concerned as it is important not to exclude information which potentially reflects current movements in the market which not all participants are yet aware of. Averages will always tend to lag the latest market developments and this would be exacerbated by removed of "leading" rates. We also noted that in the past, knowing that outliers would be removed, Submitters tended to second guess the mean and come closer to it in order to ensure their rate was not excluded. It is reasonable for processes and computer systems programming and management to be outsourced, but this should always be distinct from handing off any actual responsibility for the method and the management of the index production. 5. What level of granularity with regard to the transparency of Methodologies would enable users to assess the credibility, representativeness, relevance and suitability of a Benchmark on an on-going basis and its limitations with respect to their intended use? Relevant factors could include; criteria and procedures used to develop the Methodology, type of data used, how data is collected, relative weighting of data used, how and when judgement is used, contingency measures (e.g., methods when transaction data is unavailable, etc.), publication of information supporting each Benchmark determination, etc. Please provide examples where you consider there are currently significant gaps in the provision of this information. It should be possible for a data user easily to discover all information necessary to fully understand the benchmark definition and compilation process. In the case of the Baltic Exchange this means that the vessel description and the route definitions are all available via the www, along with the Manual for Panellists which defines the rules on submission for panellists and the calculation details including components of indices and averages and where required, adjustment ratios. Individual submissions should not be made public in order to reduce the risk of attempts to influence submissions. The Baltic also does not disclose exactly which routes its panellists cover, for the same reason. 6. What steps should an Administrator take to disclose to Market Participants and other stakeholders the contingency measures it intends to use in conditions of market disruption, illiquidity or other stresses? In the event that an Administrator wishes to exercise such a power it is critical to set it out in advance. However, the Baltic takes the view that the correct approach for its market is to publish the collected view of its expert panel and not to interfere with that process. On occasions where the market is disrupted or unusual this can lead to a wide range of views reflecting the different ideas of each panellist. However, by maintaining the method we consider we provide the best possible guidance to the market. This is distinct from a situation where it is simply impossible to report the market, where we would not do so. 7. What steps should an Administrator take to notify Market Participants of material changes to a Benchmark Methodology (including to Benchmark components) and to take their feedback into account? The Baltic Exchange runs a User Group among its members and this is the vehicle for discussion in advance of all potential changes to the method or other details. Once a decision is taken this is also the main (though not the only) route for distribution of information. The goal is always to generate a consensus for necessary action between the users and the Sumbmitters, but the Baltic retains the decision-making authority. A key distinction is that between those users of data with whom the Administrator has a commercial or other contractual relationship and those who may make use of the data without a specific licence. The latter group may well not be made aware of changes, but are of course not contributing to the costs of the production and management process. The Baltic draws a clear distinction between these groups. 8. How often should the Administrator review the design and definition of the Benchmark to ensure that it remains representative? This should be a continuous process with a willingness to act as needed. There is always a conflict between the desire to change in order (for example) to remain in line with the real physical marketplace and the perceived threat to liquidity, particularly in derivatives markets, which can be caused by a change to the benchmark. It is a fine judgement as to when change is essential and then a complex matter to resolve implementation issues and transition processes with clearing houses and all interested parties.