Introduction
Financial benchmarks are used to determine the pay-out or value of financial products or contracts or to measure the performance of investment funds. For example, the bank bill swap rate (BBSW) (which is a reference interest rate for a range of financial products) is used to determine the pay-out under financial contracts while the ASX 200 equity index used to measure the performance of funds. Financial benchmarks such as the BBSW is determined from submissions from banks or other market participants whereas the ASX 200 equity index is calculated by its administrator using regulated and publicly available data.
Prior to the introduction of this regime, financial benchmarks were not regulated in Australia. However, there have been a number of incidents of market misconduct related to the determination of financial benchmarks in Australia and abroad. In 2016 ASIC commenced court proceedings against ANZ, NAB and Westpac for alleged market manipulation and unconscionable conduct in relation to the BBSW. In response to these issues, Australia has implemented new laws to improve the administration of these benchmarks.
Benchmark Administrator Licensing Regime
ASIC can declare that a financial benchmark is a significant financial benchmark if it is systemically important to the Australian financial system or if disruption of its availability or integrity would create a material risk of financial contagion or systemic instability in Australia or a material impact on investors in Australia.
Administrators of significant financial benchmarks must be licensed and subject to general obligations imposed by the Act. ASIC can also make rules about the responsibilities of benchmark administrator licensees and the generation and administration of financial benchmarks specified in benchmark administrator licences.
Offences
Under the Act, the manipulation of financial benchmarks is an offence. It is also an offence to make a statement or disseminate information which is false or misleading, where the person knows that the statement or information could be used in the generation or administration of a financial benchmark.
Australian citizens, residents and companies are subject to these provisions regardless of where the above offences are committed, even if entirely outside Australia. Foreign entities are liable where the offence is committed at least partly in Australia. Operation of these offences is also extended to conduct occurring entirely outside Australia, if it results in or is likely to result in an Australian entity suffering a detriment.
The Act makes it an offence to administer, or hold out that an entity can administer, a significant financial benchmark without a licence.
Penalties
Individuals who commit offences related to manipulation of financial benchmarks face imprisonment for up to 10 years and/or a fine being the greater of 4,500 penalty units (currently A$945,000) or three times the value of the benefit obtained from the offence.
For companies, fines are the greatest of the following:
45,000 penalty units (currently A$9.45 million);
If the court can determine the total value of the benefits obtained – 3 x the total value; or
If the court cannot determine the total value of those benefits – 10% of the company’s annual turnover during the 12 month period prior to when the offence was committed.
Administering (or holding out that an entity can administer) a significant financial benchmark without a licence attracts up to 500 penalty units (currently $105,000) and/or 5 years’ imprisonment.
Breaches of the regime are also subject to civil penalties.
Please contact Richard Beissel or Hillary Ray of our Financial Services Team if you have any questions or would like further information.