SUBMISSION TO THE EUROPEAN COMMISSION’S CONSULTATION
DOCUMENT ON THE REGULATION OF INDICES
Name of Organisation:
International Air Transport Association
Address:
350 Avenue Louise
BE-1050, Brussels
Belgium
Interest Representative Register ID Number:
1805107590-28
Chapter 1 Indices & Benchmarks
RESPONSES
Q1.
Which benchmarks does your organisation produce or contribute data
to?
A handful of IATA member airlines who trade in physical
jet fuel contribute data e.g. to Platts and Argus Jet fob
barges Rotterdam.
Q2.
Which benchmarks does your organisation use?
IATA member airlines use different Platts, OPIS and Argus
Indices for Jet Fuel:
1) fob Rotterdam
2) cif North West Europe
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3) Mediterranean fob
5) US-Gulf Coast fip
7) Los Angeles
9) Caribbean fob
11) Singapore fob
4) ICE Brent future
6) New York Harbour fob
8) San Francisco
10) fob Arab Gulf
12) C+f Japan
Hence this submission is mainly focused on indices related
to jet fuel and to a lesser degree to crude oil.
What do you use each of these benchmarks for?
These benchmarks are used as price basis for physical
procurements as well as for settlement of derivative
contracts.
Has your organisation adopted different benchmarks recently and if so
why?
Platts indices have been the main ones used by airlines
but in the recent past, a number of airlines have added
OPIS and Argus indices for diversity reasons.
Q3.
Have you recently launched a new benchmark or discontinued existing
ones?
Some airlines have started using a price basket of Platts
and Argus indices to better cover the market and
methodologies.
Q4.
How many contracts are referenced to benchmarks in your sector?
There are several thousands.
Which persons or entities use these contracts?
IATA member airlines in general.
And for which purposes?
For defining the purchase price of Jet fuel and for the
pricing of a settlement price for derivatives.
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Q5.
To what extent are these benchmarks used to price financial
instruments?
Smaller airlines especially use these benchmarks for the
pricing of a settlement price for derivatives.
Please provide a list of benchmarks which are used for pricing financial
instruments and if possible estimates of the notional value of financial
instruments referenced to them.
The list of benchmarks include Platts fob Rotterdam, Platts
Cif NWE, Platts Singapore fob, Platts US-Gulf Coast fip
and Platts New York harbor. The notional value is
estimated to be around USD 100 billion.
Q6.
How are benchmarks in your sector set? Are they based on real
transactions, offered rates or quotes, tradable prices, panel
submissions, samples?
Benchmarks are set based on real transactions, if
available, including bid and offer price levels for a certain
time period as defined by the Price Reporting Agencies or
PRAs (e.g. Platts, Argus and OPIS).
Please provide a description of the benchmark setting methodology.
The relevant pages on the websites of the PRAs provide
this information.
Q7.
What factors do you consider to be the most important in choosing a
reliable benchmark?
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Important factors include:
- Transparency of methodology
- Data used for assessment that is based on a full
trading day not on a limited time window during a
trading day.
- Priority given to actual trades, excluding bids and
offers (because in an illiquid market bids and offers
can be abused to move prices).
- PRA’s must have accountability and a structured
mechanism to react to concerns and queries - in
this respect, the stakeholders (buyers and sellers)
need the opportunity to see a monitored and
policed (auditing entity) process.
Could you provide examples of benchmarks which incorporate these
factors?
No example on jet fuel indices come to mind. PRAs have
in some ways failed to address stakeholders’ concerns to
date and have largely shown a lack of motivation to do so.
Chapter 2 Calculation of Benchmarks: Governance
and Transparency
RESPONSES
Q8.
What kinds of data are used for the construction of the main indices
used in your sector? Which benchmarks use actual data and which use
a mixture of actual and estimated data?
Physical trades, if available, including bids and offers are
used. The dominant PRA uses forward curves and freight
rates assessed in house - although public rates are
available - to calculate a reported price.
Q9.
Do you consider that indices that do not use actual data have particular
informational or other advantages over indices based on actual data?
No.
Q10.
What do you consider are the advantages and disadvantages of using a The advantage is that this approach encompasses as
mixture of actual transaction data and other data in a tiered approach?
much information as possible to leverage accuracy. The
risk/ disadvantage (observed) is incorrect prioritization of
less relevant information e.g. actual trades (which is a
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good indicator of market price) are sometimes being
ignored whereas less reliable information such as bids are
given greater relevance.
Q11.
What do you consider are the costs and benefits of using actual
transactions data for benchmarks in your sector? Please provide
examples and estimates.
The benefit is that we see this as a more realistic reflection
of market price. The cost arises in the situation where
during no-trade periods (particularly in less liquid markets),
bids are being used (which are observed normally to be to
the detriment of accuracy). Considering trades for the full
trading day would improve the situation.
Q12.
What specific transparency and governance arrangements are
necessary to ensure the integrity of benchmarks?
Governance should be set up with the target of ensuring
transparency and accountability.
A suitable independent third party organization could be
tasked to supervise the PRAs.
Specifically for the Brent crude oil benchmark, the current
situation of transparency and governance needs to be
improved.
- The companies that are equity owners of the North
Sea fields have immediate access to critical
information that the wider market does not have.
This places the rest of the market at a decided
disadvantage.
- There should be explicit Chinese wall style
separation between the activities on the production
side and the trading side.
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-
Operators of the North Sea fields whose output is
used to price the Brent benchmark should be under
a continuous disclosure requirement to the market
of production information.
Q13.
What are the advantages and disadvantages of imposing governance
and transparency requirements through regulation or self-regulation?
Self-regulation only works if complemented by external
audits. The preference is therefore for “external”
regulation undertaken by an independent third party in line
with our answer to Q12.
Q.14
What are the advantages and disadvantages of making contributing
data or estimates to produce benchmarks a regulated activity? Please
provide your arguments.
Advantages:
- Ensures that all actual trades are reported and
taken into consideration for price assessment.
- Ensure that any data used for assessment is
explained and justified so that only relevant and
accurate data are used.
Disadvantage:
- It would be costly to administer.
Q15.
Who in your sector submits data for inclusion in benchmarks?
Traders, reported trades (brokers), market participants
(suppliers, consumers etc.).
What are the current eligibility requirements for benchmarks'
contributors?
No strict eligibility requirements are set other than that they
are “active” in the market.
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Q16.
How should panels be chosen? Should safeguards be provided for the
selection of panel members, and if so which safeguards?
A static collection of panel members/persons is not
preferred as it could limit the provision of market data in a
not very liquid market. It is key that as much trades as
possible are taken into account.
Trading data are cross checked by the PRA’s by asking
the other involved trading counterparty. This should be
sufficient.
Q17.
How should surveys of data used in benchmarks be performed?
Data to be collected in an agreed process (with welldefined boundaries).
What safeguards are necessary to ensure the representativeness and
integrity of data gathered in this way?
-
Comparison of data of all PRA’s in a data room
available to the market.
Cross checking and corrections of data break outs
(peaks and troughs) to be secured.
Q18.
What are the advantages and disadvantages of large panels?
Advantages:
- Good representation of the market if many trades
are reported.
- As trades have to be cross checked at least two
parties are involved.
Disadvantage: Slow decision process (if too large).
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Even in the case of large panels could one panel member influence the
benchmark?
A large panel reduces (but not eliminates) the risk that a
panel member delivers the only trading data, which is then
used to define the price. Specifically, in the Jet Rotterdam
market, around 6 active market players define the price.
One party with a big long or short position can have a
substantial impact on the market price.
Q19.
What would be the main advantages and disadvantages of auditing of
panels? Please provide examples.
Advantages:
- It ensures that trade data provided had been
submitted correctly.
- It can validate that reported deals have indeed
been transacted.
Q20.
Where indices rely on voluntary contributions, do you consider that
there are factors which may discourage the making of these
contributions and if so why?
In the oil market, trades are concluded in a private and
confidential manner and not reported mainly to protect the
interests of the parties concerned. There are more private
and confidential deals than there are officially reported
deals.
The exclusion of those trades does reduce the viability of
the price assessment. Nevertheless, one needs to enable
a retrospective process for including all deals (within a
defined number of days after the trade) to enable
validation and improvement of a PRA’s assessment over
time.
A transparent and fair market must be the goal and any
party that has been influencing the market has to be
identified.
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Q21.
What do you consider to be the advantages and disadvantages of
mandatory reporting of data? Please provide examples.
Advantage: Increased viability and liquidity of price
assessments which leads to more accurate values.
Disadvantage. Time consuming.
Q22.
For entities contributing to benchmarks which are regulated by financial
regulation, what would be the advantages and disadvantages of
bringing their benchmark submissions under the scope of this
framework?
It depends on the financial regulation that is specific to the
entity and benchmark. Generally, the responses in Q21
should be applicable.
Q23.
Do you consider that responsibility for making adjustments if
inadequate data is available should rest with the contributor of the data,
the index provider or the user of the index?
The responsibility of data adjustments should be borne by
the index provider who should verify the correctness and
completeness of the data
Q24.
What is the formal process that you use to audit the submissions and
calculations?
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For prices reported by the PRA, it is extremely difficult to
verify the correctness of the assessed prices as the
calculation process is very complicated or poorly
explained.
Q25.
If there are any weaknesses identified in the audit, who are they
reported to and how are they addressed?
There is no external audit in place. Queries are often
neglected.
Is there a follow up process in place?
There is no follow up process in place and a response
from the PRAs is not guaranteed.
Q26.
How often are submissions audited, internally or externally and by what
means?
We are not aware of any external audit.
Do you consider the current audit controls are sufficient? What
additional validation procedures would you suggest?
No, current audit controls are insufficient. An external
audit and complain procedure, handling of complains
should be implemented. Reported price data should be
compared regularly with the ones from other PRAs (to
understand and defend large discrepancies).
Q27.
What are the advantages and disadvantages of a validation procedure?
Please provide examples.
Validation is beneficial as it has been noticed quite often
that there are distinct price differences between the PRAs.
Q28.
Who should have the responsibility for auditing contributed data, the
index provider or an independent auditor or supervisor?
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An independent auditor which would ensure that mistakes
are duly corrected.
Q29.
What are the advantages and disadvantages of making benchmarks a
regulated activity? Please provide your arguments.
Chapter 3 The Purpose and Use of Benchmarks
Advantage:
To ensure confidence in the market, enhance the quality of
PRA reporting and improve accuracy as a reflection of the
actual market price. PRA’s cannot change their price
reporting approach based on their own decision/ own
interest only. PRAs cannot structure a market in their own
interests or move the market in a certain direction. In most
cases, markets can be influenced by parties with the most
market power (e.g. Oil Companies)
RESPONSES
Q30.
Is it possible and desirable to restrict the use of benchmarks? If so,
how, and what are the associated costs and benefits? Please provide
estimates.
Restriction of use is not desirable. Benchmarks are
needed for markets which do not have enough liquidity on
their own. Benchmarks help to clarify price levels and
reduce negotiation costs. The goal should be better
transparency and fairness – restricting the use of
benchmarks could undermine this.
Q31.
Should specific benchmarks be used for particular activities? By whom?
Please provide examples.
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There should be no restriction on who can use specific
benchmarks and how. It should be the choice of the
market participants to select benchmark suitable for their
needs.
Q32.
Should benchmarks developed for wholesale purposes be used in retail
contracts such as mortgages? How should non-financial benchmarks
used in financial contracts be controlled?
data to?
Not applicable for our market segment
Q33.
Who should have the responsibility for ensuring that indices used as
benchmarks are fit for purpose, the provider, the user (firms issuing
contracts referenced to benchmarks), the trading venues or regulators?
Benchmarks should be defined by the PRA and approved
by the regulator
Chapter 4 Provision of Benchmarks by Private or
Public Bodies
RESPONSES
Q34.
Do you consider some or all indices to be public goods? Please state
your reasons.
Yes, all.
Q35.
Which role do you think public institutions should play in governance
and provision of benchmarks?
12
Public institutions could:
- Ensure that benchmarks are properly setup
according to their targets
- Be an independent and unbiased body
- Provide full transparency
Q36.
What do you consider to be the advantages and disadvantages of the
provision of indices by public bodies?
Advantages:
- Process would be unbiased as there is no financial
interest involved
- Approach is more secured
- Fair pricing of services
Disadvantages:
- Slow adjustment process
- Slower response to changes of market conditions
Q37.
Which indices, if any, would be best provided by public bodies?
All
Chapter 5 Impact of Potential Regulation:
Transition, Continuity and International Issues
RESPONSES
Q38.
What conflicts of interest would arise in the provision of indices by
public bodies?
What would be the best way of avoiding these conflicts of interest?
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By having a bias which is driven by politics.
-
Segregation of political and economic interest.
Proficient, independent and experienced members
are a must (knowledge of the respective markets)
Q39.
What are the likely transition challenges, costs and timelines for
relevant benchmarks? Please provide examples.
There is nothing currently in existence or identified that
would be accountable to take charge and setup a new
public system. Good ideas only get implemented properly
when linked to a responsible organization and people.
Who is accountable to get this started and to run it
(according to the observations and answers already given)
– this is the weak link in the commentary to date. This
should be addressed.
Q40.
How do you consider that the adoption of new benchmarks could be
ensured? Is this best framed in terms of encouraging or mandating the
use of particular benchmarks?
-
By having independent panels in place following
and analyzing market developments.
Proposing new indices or removing unnecessary
ones (after proper consultation with stakeholders
only) - that is a missing aspect currently.
Q41.
How can reforms of the regulation of benchmarks be most easily
implemented?
Firstly, one needs clarity and transparency. Then, an
independent, representative panel of market participants
should make and communicate decisions.
Q42.
What positive or negative impacts, if any, do you see on small and
medium-sized enterprises of the possible regulation of indices, and how
could any negative impacts be mitigated?
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We do not see any significant negative impacts on small
and medium-sized enterprises. Regulation of indices
would lead to more reliable pricing information and
enterprises of all sizes using the indices would benefit from
the greater accuracy and reliability.
Q43.
Are there other impacts which should be considered? If so please
specify the nature of these impacts and provide evidence.
None
Q44.
In which countries are benchmarks used in your sector produced?
From which countries are data used for the production of benchmarks
in your sector? In which countries are benchmarks used in your sector?
Global
Q45.
Are there non-EU benchmarks which could serve as substitutes? Are
there non-EU benchmark providers which could produce similar
benchmarks?
No – we are looking at the global market anyhow but still
need regional EU specific market assessments
Q46.
Are there international benchmarks which could serve as substitutes for
national benchmarks?
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We are using international benchmarks only