The UK's Association of Corporate Treasurers (ACT) has responded to a consultation on benchmarks – 'Fair, reasonable and non-discriminatory access to regulated benchmarks' – issued by the Financial Conduct Authority.
In the association's response, published in a document on its website, the ACT responds to three questions on the proposals for introducing the Fair, Reasonable and Non-Discriminatory (FRAND) rules and guidance, the wording of the proposals and also the cost-benefit analysis.
It notes that corporates are light users of benchmarks, which are primarily used as reference rates by banks for loans and derivatives. The benchmark most used by corporates is the London Inter-Bank Offered Rate (Libor). Companies are likely to use these for purposes such as intercompany loans, penalty interest rates for late payments or internal derivatives with subsidiaries.
The document goes on to say that corporates, in the main, do not use benchmarks in trading rates but typically use them only as a reference rate in hedges. It notes: “This is an important distinction from financial institutions who will often speculate and trade the value of the benchmark. There are a small number of non-financial industries where this is the exception, for example oil and gas companies.”
One sticking point is the usage licence fee for any party using Libor rates in valuation and pricing activities or as a reference rate in transactions and financial products. The fee is $8,000 a year for a single currency and $16,000 for multiple currencies. The ACT says it considers this fee to be a “not insignificant overhead for a corporate treasury function that typically only has a team of 2-5 people.”
The ACT also states: “Where the corporate is effectively dealing with a benchmark that is a monopoly, they have no other choice but to use the benchmark. The FCA have stated that they will not approve or 'sign-off' on benchmark administrators' pricing structures but we would encourage some oversight on user fees to corporates.”
In principle the ACT agrees with the introduction of FRAND requirements to address competition concerns relating to access to regulated benchmarks. It also agrees with the principle that different fees can be charged to different users where this is objectively justified and considers it important that they should be. In determining the level of fees the ACT stresses that corporates typically are “light” users of benchmarks. Hence they should be charged a different fee level, as distinct from merely being charged a different fee.
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