Bank of Latvia response to consultation on indices
Chapter 1. Indices and Benchmarks: What they are, who produces them and for
which purposes
(1) Which benchmarks does your organisation produce or contribute data to?
The Bank of Latvia calculates the RIGIBID and RIGIBOR rates. RIGIBID is the index of
Latvian interbank deposit interest rates and RIGIBOR is the index of Latvian interbank credit
interest rates.
(2) Which benchmarks does your organization use? What do you use each of these
benchmarks for? Has your organization adopted different benchmarks recently
and if so why?
The Bank of Latvia has been using a broad range of benchmarks for the purposes of analysis
of domestic financial market developments, assessment of their impact on Latvian economies
as well as for the management of FX reserves. Therefore, the most commonly used
benchmarks are money market indicators (RIGIBOR, EONIA, EURIBOR and LIBOR, OIS),
credit market indices (yield curves, sovereign CDS) as well as most popular commodities and
energy indices are also used for the purpose of macroeconomical analysis. RIGIBOR,
EURIBOR and LIBOR are most widely used by our banking sector for a wide range of retail
products such as mortgages and loans.
(3) Have you recently launched a new benchmark or discontinued existing ones?
No, we have not. Meanwhile the individual quotes of the banks included in the RIGIBID and
RIGIBOR calculation are published on the Bank of Latvia website starting from November 1,
2010.
(4) How many contracts are referenced to benchmarks in your sector? Which
persons or entities use these contracts? And for which purposes?
There is no a comprehensive source of data available on the use of benchmarks by Latvian
financial sector. RIGIBOR is the only benchmark of lats money market rate that are publicly
available and used for the reference rate. According to our observation, money market indices
like RIGIBOR for national currency, EURIBOR for EUR currency and LIBOR for USD
currency are the main reference rates in the mortgage and consumer credit contracts as well as
corporate sector credit contracts. Credit contracts with variable interest rates are dominant for
new loan takers. RIGIBOR, EURIBOR and LIBOR are also used to determine the price of
interbank loans. Interest rates of issued bonds are also set to floating rate based on
benchmarks like LIBOR and EURIBOR.
(5) To what extent are these benchmarks used to price financial instruments? 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.
See the answer to the previous question.
(6) How are benchmarks in your sector set? Are they based on real transactions,
offered rates or quotes, tradable prices, panel submissions, samples? Please
provide a description of the benchmark setting methodology.
The Bank of Latvia calculates and publishes RIGIBID and RIGIBOR indices every business
day at 12.00 noon local time, using the lats money market interest rates quoted in the
REUTERS by the banks included in the quotation list. Currently the quotation list consists of
7 banks. The highest and the lowest quoted interest rates are discarded and the remaining used
to calculate the mean lats money market interest rate. RIGIBID and RIGIBOR are calculated
for deals with an overnight maturity, a maturity of 1 day (starting with the next business day),
1 week, 1, month, 6 months or 12 months.
(7) What factors do you consider to be the most important in choosing a reliable
benchmark? Could you provide examples of benchmarks which incorporate these
factors?
In our point of view, the following factors are the most important to strengthen reliability of
benchmarks:
- transparent and comprehensible calculation mechanism;
- calculations based on quoted interest rates of trusted market participants;
- calculation mechanism and submitted quotes should be subject to regular scrutiny and
controls, if available, controls based on real transaction data;
- formal regulation;
- in the case of benchmarks not calculated and governed by central bank or other public
authorities, an adequate oversight function should be carried out.
Chapter 2. Calculation of Benchmarks: Governance and Transparency.
(8) 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?
RIGIBID and RIGIBOR are constructed directly from interest rate (bid and ask) quotes in the
REUTERS by selected banks.
(9) Do you consider that indices that do not use actual data have particular
informational or other advantages over indices based on actual data?
Interbank indices that do not use trading prices could probably be more sensitive to
fluctuations of market sentiment and are able to reflect the prices even if the interbank market
has dried up as well as could offer longer maturity structure. However, for the maturities with
a few trades the risk of manipulation or inclusion of transactions with specific terms in
calculation of benchmark could result in miscalculation of the benchmark and led to the
misleading of the market.
(10) What do you consider are the advantages and disadvantages of using a
mixture of actual transaction data and other data in a tiered approach?
The main disadvantage could be the complexity and transparency problems of such system. In
practise it could mean that in normal times are used transaction data while in affected markets
submission will be based on expert judgement.
(11)
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 use of actual transaction data for benchmarks could lead to shorter maturities (maximum
up to one month) instead of currently published benchmarks with maturities up to 12 months.
In a case of low transaction volumes even transaction data approach will not be immune to
manipulation. Adversely, by increasing the number of contributors or/and broadening the
benchmark definition we could limit the impact of each individual submitter.
(12)
What specific transparency and governance arrangements are necessary to
ensure the integrity of benchmarks?
Following arrangements should be carried out:
- comprehensiveness and transparency of the process for calculation of benchmarks;
- to provide a competent authority or organization with transaction statistics and powers to
scrutinise ex-post the contributors submitted data on regular basis.
- to ensure that only contributors with spotless reputation and high ethical standards are
included in calculation of benchmarks;
- an immediate revision of contributor list, if contributor doesn`t meet the requirements and
standards set for benchmark;
-preferably benchmarks should be calculated and managed by public entities, such as central
banks or supervisor, not industry representatives.
(13) What are the advantages and disadvantages of imposing governance and
transparency requirements through regulation or self-regulation?
The recent findings in respect of the benchmarks have revealed the weaknesses of selfregulation mechanism. It seems that independence of such governance structure is insufficient
with lack of incentives for enforcing stricter standards and initiatives for implementation of
adequate regulation.
(14) What are the advantages and disadvantages of making contributing data or
estimates to produce benchmarks a regulated activity? Please provide your
arguments.
Regulated activity means a more credible mechanism, clearer rules and greater transparency.
Meanwhile, regulation should be effective giving the powers to revise immediately
contributor list if some of them does not comply with rules and regulation as well as scrutinise
submissions on regular basis
(15) Who in your sector submits data for inclusion in benchmarks? What are the
current eligibility requirements for benchmarks' contributors?
The RIGIBID and RIGIBOR commission consisting of the five experts from the Bank of
Latvia approves the list of banks whose valuation of the prices of resources in national
currency is the basis for the calculation of RIGIBID and RIGIBOR.
The procedure and main criteria for eligibility are set in "Regulation for the Calculation of
RIGIBID and RIGIBOR" and are following:
- the bank submits a written application expressing its willingness to be included in the list
and readiness to take the necessary organizational steps to ensure that the interest rates
quoted by it in REUTERS will be available constantly and without interruption caused
by employee errors or technical reasons;
- the RIGIBID and RIGIBOR commission carry out a consultation with other contributors
to obtain their view on the applicant compliance with requirements set in the regulation;
- only those banks that are active participants in the lats money market and capable of
making active market transactions in accordance with the lats money market interest rates
quoted by same banks even in a fluctuating financial market could be included in the list;
- only those banks whose share in the lats money market has been the greatest are included
in the list;
- only sound banks of high ethical standards and spotless reputation are included in the list.
(16) How should panels be chosen? Should safeguards be provided for the
selection of panel members, and if so which safeguards?
The panel should consist only of participants with high ethical standards and spotless
reputation. Preferably panel should be broadened to cover larger market share. The revision of
panel should be done on regular basis and to execute an immediate revision of panel if
compliance with requirements set in the regulation is no longer fulfilled.
(17) How should surveys of data used in benchmarks be performed? What
safeguards are necessary to ensure the representativeness and integrity of data
gathered in this way?
The existing practise of using simple mean of the bank`s individual submissions and
discarding the highest and lowest values of submissions seem to be appropriate for
benchmark calculation. Especially for markets with low real transaction activity, two-way
quote process (quotation of bid and ask prices) should preferably be used.
(18) What are the advantages and disadvantages of large panels? Even in the case
of large panels could one panel member influence the benchmark?
A large panel will be more representative and more reliable indicator as it will cover larger
market share. By dropping one of more highest and lowest quotes we can eliminate the
influence of extremes. Meanwhile, it is worth to consider using the median instead of the
simple mean.
(19) What would be the main advantages and disadvantages to auditing of panels?
Please provide examples.
The panel should be audited internally on regular base for compliance with the rules.
Requirement for external audit on benchmark processes will bring additional cost and need to
provide extra funding.
(20) 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?
For the time being we have not observed discouraging factors of making contributions.
(21)
What do you consider to be the advantages and disadvantages of mandatory
reporting of data? Please provide examples.
Introduction of mandatory reporting system could be used effectively for a transaction data
approach (collection of actual transactions data for computation of benchmarks) while for
submissions based on expert judgement we couldn`t see potential benefit and possible
improvements in current calculation mechanism.
(22) 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?
The main advantage would be the possibility to take regulatory actions against contributors
and individuals in relation to possible misconduct. As well as confidence in the benchmarks
could also be enhanced through this framework.
(23) 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?
In a case of inadequacy of data an adjustment should rest with the contributor of the data as
only contributor’s expert judgement could be the most appropriate way of making
adjustments and could provide objective assessment of the market conditions even in a thin
market.
(24) What is the formal process that you use to audit the submissions and
calculations?
The RIGIBID and RIGIBOR commission coordinates all the activities related to calculating
the RIGIBID and RIGIBOR. It consists of five experts of the Bank of Latvia. The RIGIBID
and RIGIBOR commission conducts an audit normally at intervals of at least one quarter and
more frequently if necessary. During the audit individual submissions are compared with
transaction data during the last quarter. Submitters compliance with the criteria stipulated in
"Regulation for the calculation of RIGIBID and RIGIBOR" for inclusion of submitter in
quotation list are also checked.
(25) If there are any weaknesses identified in the audit, who are they reported to
and how are they addressed? Is there a follow up process in place?
The members of RIGIBID and RIGIBOR commission review the prepared statistical report
on a regular basis. The report includes individual submissions and actual transactions data
reported to the Bank of Latvia (interest rates, term structure, volumes) as well as some
specific indicators that describe the individual bank behaviour in the market (share of
submitted extreme (max and min) values, measurement of individual bank inactivity, relative
and absolute difference between individual bank quotes and calculated benchmark). At the
meetings RIGIBID and RIGIBOR commission takes the decision by a simple majority
whether to leave the list of contributors unchanged or make a change in the list if there is a
need.
(26) How often are submissions audited, internally or externally, and by what
means? Do you consider the current audit controls are sufficient? What additional
validation procedures would you suggest?
The RIGIBID and RIGIBOR commission conducts an audit at intervals of at least one quarter
and more frequently if necessary, for example, if a written application has been received from
market participant. In our view the current audit regime is appropriate and fair enough to
ensure an effective decision making process.
(27) What are the advantages and disadvantages of a validation procedure? Please
provide examples.
If possible, validation process should be improved, for example, by transaction information.
Meanwhile, it should be avoided to become too complicated or time consuming.
(28) Who should have the responsibility for auditing contributed data, the index
provider or an independent auditor or supervisor?
We support the view that supervisors should take more active role by developing appropriate
regulation and auditing data estimates for those benchmarks set by private institutions.
(29) What are the advantages and disadvantages of making benchmarks a
regulated activity? Please provide your arguments.
Regulation could contribute to the trustiness of market participants, build confidence in the
benchmarks and aid the efficiency of markets.
Chapter 3: The Purpose and Use of Benchmarks
(30) 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.
We should respect the intentions of the parties where they have made an express choice of
benchmark. Meanwhile, the competent authorities should take all the efforts to foster
managers of benchmark setting process to ensure high degree of transparency and
understanding.
(31) Should specific benchmarks be used for particular activities? By whom? Please
provide examples.
No, the choice should be left with the contract parties.
(32) 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?
At this stage, this is the best solution available in the market.
(33) 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?
It could be the responsibility of provider to ensure understanding of benchmarks in the market
and carry out appropriate surveys on the use of benchmarks.
Chapter 4: Provision of Benchmarks by Private or Public Bodies
(34)
Do you consider some or all indices to be public goods? Please state your
reasons.
We support the view that the indices are indeed public goods.
(35)
Which role do you think public institutions should play in governance and
provision of benchmarks?
The regulators need to take on a bigger role in overseeing financial benchmarks. For the
purposes of re-establishment of confidence in market integrity the provision of benchmarks
may be undertaken by the public institutions.
(36) What do you consider to be the advantages and disadvantages of the provision
of indices by public bodies?
Private bodies are less inclined to ensure integrity due to presence of commercial interests and
conflicts of interest.
(37) Which indices, if any, would be best provided by public bodies?
Chapter 5: Impact of Potential Regulation: Transition, Continuity and International
Issues.
(38) 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?
Current organizational structure has not given the rise to any conflict of interest. It should be
stated that the members responsible for provisioning indices have to report in due time any
conflict of interests which might undermine their objectivity.
(39) What are the likely transition challenges, costs and timelines for relevant
benchmarks? Please provide examples.
At this stage there is no consideration of any transition.
(40) 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?
Due to the fact that money market indices are used as reference rates in a long term retail
mortgage contracts, the necessity for co-existence of old and new benchmarks will be needed
for a very long term. Meanwhile, it is possible that inertia of market participants will not
provide sufficient incentives for parties involved in transactions to choose the new
benchmark.
(41) How can reforms of the regulation of benchmarks be most easily
implemented?
The recent lessons learned from the attempted manipulations of benchmarks revealed that
formal regulation and an appropriate sanctions regime is required.
(42) What positive or negative impacts, if any, do you see on small and mediumsized enterprises of the possible regulation of indices, and how could any negative
impacts be mitigated?
Regulation of indices will provide greater clarity and is needed to re-establish confidence and
build trust in the benchmarks.
(43) Are there other impacts which should be considered? If so please specify the
nature of these impacts and provide evidence.
There is need to find a way to make contributing to benchmarks more attractive to potential
contributors or to give a power enabling regulator to force banks to participate. Otherwise this
will probably create a problem to find accurate and reliable volunteers.
(44) In which countries are benchmarks used in your sector produced? From
which countries are data used for the production of benchmarks in your sector sourced?
In which countries are benchmarks used in your sector used?
Due to the fact that our benchmarks reflect only money market rates in national currency the
usage of RIGIBID and RIGIBOR are in practice limited with the domestic financial market
(interbank market, retail and wholesale mortgage loans and corporate loans).
(45) Are there non-EU benchmarks which could serve as substitutes? Are there
non-EU benchmark providers which could produce similar benchmarks?
No, there are not.
(46) Are there international benchmarks which could serve as substitutes for
national benchmarks?
At this stage there is no alternative benchmark available for national currency.