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A recent clarification to the Benchmarks Regulation means that additional funds are suddenly now affected. Fortunately, it’s not too difficult to comply if you know what you’re doing.
Passive asset managers are well aware of the need to comply with the EU Benchmarks Regulation, introduced in the wake of the LIBOR and FX fixing scandals. What is not so widely understood is that if your fund is actively managed, you might be caught by ESMA’s latest clarification of the regulation*. The Q&A document states that actively managed funds whose asset allocation is constrained relative to a benchmark are within the scope of the regulation.
What does this mean for actively managed funds? You could now be caught by the regulation, even if you don’t define your performance with reference to an index. You might be in scope if, for example, your description of a fund says something like: “For our active fund management, we choose a small number of companies from the broader FTSE 100…”
If so, you’re subject to article 28(2) of the Benchmarks Regulation, which begins: ‘Supervised entities… shall produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided…’
In other words, you need to explain exactly what you would do if the index you refer to ever undergoes a material methodology change, or stops existing, however remote that possibility seems. For example, you will need to explain how you would identify an alternative index, what you would do if no suitable alternative could be found, and in both cases how you would then communicate the change to your clients.
Although the clarification was made only recently, technically these obligations began on 1 January. Companies affected can’t afford to ignore the obligations any longer – being unaware is never a successful defence with the regulator or in law. At an individual level, compliance officers will want to avoid having to explain to the board why they’ve overlooked this one.
The good news is that the effort required to comply is relatively modest. Contact us today to establish whether you’re captured by the clarification, how you can meet your obligations, and whether you can legitimately remove yourself from the scope of the regulation – which in some cases may be the best option.
* ESMA, Questions and Answers On the Benchmarks Regulation (BMR), version 7, Version 7 updated on 24 May 2018. See paragraph 5.4.
