Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 1 Background
Outline of chapter
1.1 Chapter 1 sets out the background and context for the reforms to the regulation of financial benchmarks contained in Schedule 1 to the Bill.
Context of amendments
1.2 Financial benchmarks are used to determine the pay-out or value of financial products or contracts, or to measure the performance of investment funds.
1.3 The ASX 200 equity index is an example of a financial benchmark used to measure the performance of funds, while the bank bill swap rate (BBSW) (which is used as a reference interest rate for a range of financial products) is an example of a financial benchmark used to determine the pay-out under financial contracts.
1.4 While some benchmarks are calculated by their administrator using regulated and publicly available data (such as equities indexes), others rely on submissions from banks or other market participants (for example, reference interest rates like the London Interbank Offered Rate (LIBOR) and Australia's BBSW).
1.5 Globally there have in recent years been many cases of market misconduct regarding the determination of financial benchmarks (particularly interest rate reference benchmarks such as LIBOR). As of August 2017, penalties paid by financial institutions globally had reached around AUD25 billion.
1.6 In Australia, the Australian Securities and Investments Commission (ASIC) commenced formal court proceedings in 2016 against ANZ, NAB, and Westpac for alleged market manipulation and unconscionable conduct in relation to the BBSW. These court proceedings are continuing.
1.7 In 2013, in response to these issues, the International Organization of Securities Commissions (IOSCO) developed the Principles for Financial Benchmarks, IOSCO (the IOSCO Principles), which set out the desirable characteristics of a regulatory regime for financial benchmarks. A number of jurisdictions, including the United Kingdom, the European Union (EU), Japan, Singapore and Canada, have since worked to align their regulatory regimes with the IOSCO Principles.
1.8 In line with these developments, the Government has decided to implement a regulatory framework for financial benchmarks in Australia that is consistent with the IOSCO Principles.
1.9 The amendments made by the Schedule 1 to the Bill are based on recommendations made by the Council of Financial Regulators (CFR)  for reforming the regulation of financial benchmarks used in Australia consistent with the IOSCO Principles. The CFR's recommendations were formulated following extensive consultation with stakeholders.
1.10 Administration of financial benchmarks at present does not require a licence and is not a regulated activity under current law. Consistent with overseas regulatory developments, manipulation of financial benchmarks will be made a specific offence.