LONDON A benchmark used in the $630 trillion market for swaps will be based on actual market transactions rather than quotes from banks this year in an effort to make it less vulnerable to rigging and to comply with new global transparency rules.
The blueprint from the International Swaps and Derivatives Association (ISDA) is the latest response to intense regulatory pressure being exerted on the financial industry to restore trust after rigging scandals.
The global derivatives trade body is changing how its ISDAfix index is compiled following a U.S. and UK investigation into the process.
The ISDAfix is widely used by corporations and governments to fine tune their borrowing costs and can affect a range of products from pension annuities to real estate investments.
A number of benchmarks have come under scrutiny after several banks and interdealer broker ICAP IAP.L were fined for rigging the London Interbank Offered Rate, or Libor. Probes into foreign exchange benchmarks are continuing.
ISDA announced on Monday a two-stage approach to moving from a benchmark based on quotes from banks to live prices from third party electronic trading platforms by the start of 2015.
The shift follows new standards from a global group of securities regulators, the International Organization of Securities Commissions (IOSCO), that state benchmarks should be based on actual transactions rather than estimates from banks, which regulators consider more vulnerable to manipulation.
ISDA said the first phase will be completed in the first quarter of this year and includes culling some of the less liquid ISDAfix currencies, mirroring a step already taken for some Libor benchmarks.
Quotes submitted by banks will have to be "executable bid and offer rates" falling within certain contract sizes to ensure consistency.
The second phase, which involves moving from bank submitted quotes to using only live prices from trading platforms, starts in the second quarter of this year for euro swaps, with U.S. dollar and sterling swaps to follow by early 2015.
Prices will be drawn from a new breed of platforms - swaps execution facilities, or SEFs, in the United States and organized trading facilities, or OTFs, in the European Union - and existing interdealer platforms such as ICAP.
From Monday, ICAP will no longer be the collection agent for the ISDAfix U.S. dollar rates, with this task handed to Thomson Reuters (TRI.TO), which is already the agent for all non-U.S. dollar ISDAfix rates.
"We appreciate ISDA's interest in having a consistent polling process across each of the relevant currencies and fixings," ICAP said in a statement.
"As swap market structures evolve, we remain committed to participating in the development and administration of benchmark processes where we can add value to market functioning and transparency," it added.
Thomson Reuters confirmed it has taken over the collection of U.S. dollar ISDAfix contributions.
"Thomson Reuters and ISDA will work together with all parties during this period of transition," it said in a statement.
Regulators want all major benchmarks to have an independent administrator.
ICE (ICE.N) will become the administrator for Libor from next month, stripping a UK banking trade body of this role, and ISDA is considering whether ISDAfix should also have its own independent administrator.
(Editing by Louise Heavens)