Why is IOSCO accreditation a significant step for the lithium market?

In September, Fastmarkets completed an external assurance review for 13 of its benchmark metals and minerals prices, including four of its lithium price assessments.

This made us the first price reporting agency (PRA) to achieve Type 1 IOSCO assurance in the lithium space.

The previously small and opaque lithium market has gained interest from the investment community over the past couple of years thanks to the burgeoning battery and electric vehicle sectors, of which lithium is a key component.

During that time, the lithium market has gained interest from the financial sector. The price and market structure have become a major topic of discussion for the physical market, all of which points towards a market maturing at quite a pace for the material dubbed “the oil of the 21st century”.

Here, Fastmarkets’ reporting, compliance, and development teams outline what IOSCO assurance is and why it is such an important and relevant step on lithium’s journey of market maturation.

Why does IOSCO exist and what are the key points?

The International Organization of Securities Commissions (IOSCO) is the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation.

IOSCO members have developed principles for PRAs and resolved to:

  • Cooperate in developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight and enforcement to protect investors; maintain fair, efficient and transparent markets; and seek to address systemic risks
  • Enhance investor protection and promote investor confidence in the integrity of securities markets through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries
  • Exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation

What does achieving IOSCO accreditation entail?

IOSCO accreditation is a continuing process that requires a formal audit once a year. Type 1 accreditation – the first step – provides “limited assurance”, meaning our policies, processes and controls for lithium have been checked and sample audits have been completed. In our case, PwC has completed sample audits of randomly selected data sets. The next step of Type 2 accreditation – which we have achieved so far for our 62% iron ore index and duty-unpaid in-warehouse Rotterdam aluminium premium assessment – provides “reasonable assurance,” bringing with it additional checks of randomly selected data samples.

Although lithium is a relatively immature market compared with aluminium and iron ore, we align our practices to the price discovery standards set out by IOSCO to ensure our published prices follow a replicable and transparent methodology that can be trusted by its market participants.

When did Fastmarkets start the process of aligning itself with IOSCO principles?

We have applied a robust methodology that has been widely recognised by the physical market for a sustained period. While increasingly moving to provide financial hedging instruments, we’ve taken concerted steps to cement the credibility of our price-reporting processes and controls by getting an IOSCO stamp of approval.

The process of ensuring our processes are aligned with the IOSCO principles began in earnest in 2012, with the development of a proprietary auditable system called MInD (the Markets Information Database). This was rolled out across our metals price reporting in 2014 and to minerals – including lithium – in 2016.

Has Fastmarkets changed its processes to achieve accreditation?
To date, we have received third-party assurance for 13 key prices but all our prices have been developed to align with the overarching principles outlined by IOSCO.

IOSCO alignment is predominantly a matter of refining our approach to price discovery and making that process fully auditable rather than drastically amending our standard practices. The procedure of price discovery is fundamentally unchanged since we started the process of aligning our practices to IOSCO principles.

The main change is in the way our price reporters record the data they collect and then set the prices they publish. In 2014 we started to roll out MInD, which allows us to capture and review all aspects of the pricing process – from collecting and storing data, to editor sign-off of prices and to extracting that data to provide unparalleled insight on market trends.

What does it mean in terms of day-to-day processes?
We provide detailed specification and methodology documents for our prices, including lithium. External IOSCO assurance gives confidence that our detailed methodology is being followed, which entails complete auditability of the pricing process. In practise, this means logging intricate details (pertaining to trade size, chemical specification and delivery terms, for example) for each data point that one of our price reporters collects; detailing and justifying the use of expert judgement where data points are considered outliers; and ensuring data submitters are reliably and truthfully contributing to the price discovery process. In turn, this translates into reference prices that the physical and financial markets can use with confidence.

What does your auditor actually check? Do they look at individual data sets?

An auditor looks at processes, policies and controls as well as conducting sample audits of a specified market. In our case, PwC picked dates at random to review how lithium data was obtained for a particular pricing session; the price that was ultimately published; and whether we have adhered to the processes and controls that we say we do.

Does it affect a reporters’ decision-making?
Not consciously but having to abide stringently to a methodology and publish a detailed rationale at the time of publishing a price assessment evidently reinforces the need to justify one’s decision making. Our lithium price reporters are trained in two aspects: first, our underlying methodological approach to price discovery; and second, on the workings and intricacies of the lithium market itself. This means Fastmarkets’ price reporters are perfectly positioned and empowered to make well-informed and balanced decisions when publishing representative prices.

Does Fastmarkets plan to put more prices through this process?
Yes. The intention is to put those prices for which we have achieved Type 1 accreditation through an audit for Type 2 accreditation and to achieve accreditation for other physical benchmarks published by Fastmarkets.

Has a regulator forced you to adopt the IOSCO principles?
No – but independent assurance gives confidence and credibility to third-party pricing mechanisms. It enables anybody with exposure to our prices to have complete confidence that the methodology outlined is rigorously followed and that third-party assurance is desirable when billions of dollars of business are transacted based on our metals and minerals price assessments every year.

How does third-party IOSCO assurance change the market’s use of prices produced by Fastmarkets?
For physical market participants, it further confirms there is a credible and standardized approach to price discovery, which is carried out by impartial but well-informed price reporters.

IOSCO’s principles for PRAs ensure that price reporting for commodity benchmarks meet the highest standards. The external IOSCO assurance we have received consistently at Fastmarkets since 2017 demonstrates our commitment to undertaking limited and reasonable assurance reviews on a cross-section of our global benchmark prices.

Our reference prices have long been used in physical market contracts with confidence but external IOSCO assurance means they are also viable as the basis for settlement of exchange contracts.

Many of the markets we monitor and publish representative prices for have seen increasing physical market volatility and, with that, investor and financial sector interest. While we increasingly service these groups, we want to ensure all of our prices are delivered to the same uniform standard, allowing for confidence in the use of our prices and any related financial instruments.

This is of particular relevance to lithium, where prices have seen strong swings, and because parties including the London Metal Exchange have outlined a specific interest in launching a cash-settled futures contract. The LME, in collaboration with the lithium industry, is reviewing proposals from PRAs including Fastmarkets and the feasibility of cash-settling a lithium futures contract against a third-party reference price. Should that materialise, an IOSCO-compliant physical benchmark will be a necessity.

Access Fastmarkets’ battery-grade lithium prices
We are currently sharing the four Type 1 assured battery-grade lithium prices for free. Check out our Lithium Price Spotlight to access the latest prices and keep up to date with price trends.

To speak with one of our team about our prices and pricing processes, email us at pricing@fastmarkets.com.