Administrators of financial benchmarks have a number of ongoing obligations. The licence is a market services licence under Part 6 of the Act so has certain key standards and general conditions, as well as those specific to an administrator of a financial benchmark. In addition, the FMA may impose entity specific conditions.
To meet and maintain certain key standards set out in section 396 of the Act:
- the eligibility criteria prescribed by the Regulations must be satisfied
- directors and senior managers (current or proposed) must be fit and proper for their positions
- the business must be capable of performing the service effectively and in keeping with licence conditions
- we must have no reason to think you're likely to contravene your licensee obligations.
General conditions for market service licensees
Under section 402 of the Act, a licensee or authorised body may only provide the market services or class of market services to which their licence relates, and only by those people authorised under the licence.
Section 403 confirms that the FMA may, by written notice, impose conditions on a licence when the licence is issued, and vary, revoke, add to, or substitute any conditions of licence imposed under this section at any time after the licence is issued.
Part 6, subpart 2 of the Regulations provides reporting conditions for market service licence holders. Benchmark administrators must report to the FMA as soon as practicable if certain events occur or are likely to occur, including insolvency, director or senior manager bankruptcy, certain proceedings against the entity or its directors or senior managers, resignations and appointments of directors, senior managers or an auditor, a change of the entity name, or a proposition to enter into a major transaction. Refer to section 191(1) of the Regulations for full details of reporting events.
Conditions for benchmark administrators imposed by the Regulations
Section 448B of the Act provides the purpose for licensing administrators of financial benchmarks. When considering a license application we will assess whether this purpose is being met.
Part 3 of schedule 28 of the Regulations sets out conditions specific to an administrator of a financial benchmark licence. See the schedule for further details - a summary is below.
Governance and management conditions
A benchmark administrator must:
- regularly review its systems and procedures for governance and oversight, and conflicts of interest and identify and promptly remediate any deficiencies
- ensure all outsourcing arrangements are in a written contract, that the activity is performed by the nominee in the same manner and subject to the same duties and restrictions as if the administrator were performing it directly, and monitor the performance of that activity
- ensure its board provides the independent oversight committee with an opportunity to comment on, and make recommendations about, any matter within the committee’s responsibility, and has regard to each recommendation of the committee, and notifies the committee in writing of—
- the steps that have been or will be taken in response to the recommendations; or
- any decision by the board to decline to adopt the recommendation, with its reasons for doing so
- permit the independent oversight committee to notify the FMA if it knows or suspects that, in connection with the service covered by the licence:
- the licensee or an authorised body has or may have contravened, or is likely to contravene, a market services licensee obligation; or
- a contributor has or may have contravened, or is likely to contravene, an obligation imposed by or under the Act.
Generation and operation conditions
A benchmark administrator must:
- act in a fair, orderly, and transparent manner when generating and operating the specified financial benchmark
- to the extent that it is reasonably practicable to do so, generate and operate the specified financial benchmark in a manner that—
- is appropriate for the nature, complexity and intended use of the benchmark;
- maintains the accuracy, integrity, reliability and continued availability of the benchmark; and
- does not adversely affect the integrity of any market connected with the benchmark.
- take all reasonable steps to ensure the financial benchmark data is sufficient to accurately and reliably represent the state of affairs the benchmark is intended to represent, and is based on active market data if suitable data is available.
- continue to use a financial benchmark methodology that complies with the eligibility criteria in schedule 28, part 2, clause 9 of the Regulations, and have in place methods to regularly review, test, systematically identify and promptly remedy deficiencies in—
- the methodology; and
- the use of that methodology by the licensee and any authorised body.
- take reasonable steps to consult with users of their benchmark about any proposed changes (other than a change made to comply with a direction from the FMA) including any users, or their representatives that the licensee or authorised body considers will be substantially affected by the change; and if a change is then implemented, to notify users within a reasonable time before it is implemented
- if the specified benchmark is an interest rate benchmark, to maintain a methodology (final stage) for generating and operating the benchmark that is designed to allow the licensee or an authorised body to generate and operate the benchmark when the methodologies normally used have failed, or are likely to fail; and such methodology must, to the extent that is reasonably practicable, include generating and operating the benchmark by using information or data that is based on the exercise of expert judgement by the contributors
- make publicly available the following information to the extent necessary to ensure users of their benchmark have sufficient information to understand how it is developed and its intended use:
- an explanation of the state of affairs the benchmark is intended to represent; and
- a description of the financial benchmark methodology, including the matters set out in schedule 28, part 2, clause 9 of the Regulations.
A benchmark administrator must notify the FMA if the licensee or authorised body (as applicable):
- proposes to make a material change to the financial benchmark methodology or final stage methodology for the specified financial benchmark
- proposes to make a material change to the contributor conduct rules
- knows or suspects that a contributor has committed, is committing or is likely to commit a significant contravention of part 2 of the Act (which relates to fair dealing) in connection with the service covered by the licence; or
- intends to cease generating or operating the specified financial benchmark and must, at least 4 weeks before ceasing, ensure it:
- confirms the arrangements for ensuring the orderly transfer of the generation or operation of the benchmark to another person, or the orderly cessation of the generation or operation of the benchmark; and
- confirms any changes to those arrangements made after the notification above, as soon as reasonably practicable afterwards.
A benchmark administrator must:
- create and maintain records that enable the licensee and the authorised body to demonstrate compliance with the market services licensee obligations
- create and maintain records of any matters notified by the contributor under the contributor conduct rules, and keep all other information or data provided or made available by each contributor
- keep a copy of the records, information and data that comes into its possession for at least 7 years after it comes into its possession.
- on written notice from the FMA, give it any records, information or data, or class of records, information or data specified in the notice, as well as any reasonable assistance required to access or reproduce it in a usable form.
- monitor each contributor’s compliance with the contributor conduct rules, and take the steps specified in those rules if the contributor reports an error, a discrepancy, or a suspicious activity or the contributor notifies the administrator of a breach of the contributor conduct rules
- investigate complaints in a timely and fair manner, and ensure the outcome of an investigation is communicated to the complainant as soon as practicable
- obtain an assurance engagement (including an assurance report) with a qualified auditor, in accordance with applicable auditing and assurance standards, that determines whether the licensee’s (and every authorised body’s) systems and procedures were suitably designed to meet the market services licensee obligations and operated effectively; and ensure such engagements cover specific 2-year periods and are obtained within 4 months after the period end date, unless an alternative date is specified in a notice given by the FMA.
Financial reporting obligations
Administrators of financial benchmarks are FMC reporting entities and so must:
- keep proper accounting records to assist with the preparation of compliant financial statements, in English and with a copy kept in New Zealand
- prepare financial statements for the entity’s (or group's) operation, which comply with generally accepted accounting practices in New Zealand
- ensure its financial statements are audited by a licensed auditor or registered audit firm
- lodge financial statements and the auditor’s report with the Companies Office within 4 months of the balance date.
The Act sets out minimum compliance standards of behaviour for people operating in the financial markets. It prohibits:
- misleading or deceptive conduct
- false or misleading representations
- unsubstantiated representations
- offers of financial products in the course of unsolicited meetings