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Asian benchmark providers are mulling over commercial and strategic reasons to determine whether it is worthwhile for them to continue to provide benchmarks in the EU given the onerous regulatory requirements and the high costs of compliance.
The EU Benchmarks Regulation requires benchmarks originated outside the EU to be appropriately regulated in their home jurisdictions, whose regimes must be deemed equivalent by the European Securities and Markets Authority (ESMA).
While ESMA also offers two other routes to benchmark providers in other jurisdictions, i.e., seeking endorsement and recognition from their European counterparties, these options are far from easy to fulfil, experts said.
Since the introduction of the EU regulation in January this year, the global financial markets are beginning to see some degree of confusion.
The extra-territorial impact of the EU regulation is massive, largely because EU lawmakers have not given sufficient consideration to a number of areas, said Tobias Sproehnle, benchmark compliance consultant at Bovill London.
Asian benchmark providers are finding it difficult to determine their strategic position amid the confusion, Sproehnle said. With little explanation from ESMA, some Asian benchmark providers have decided to “bite the bullet” and get compliant with the EU requirements, he said.
Complying with IOSCO’s principles a first step
Other Asian benchmark providers, however, are trying to find ways to avoid being caught by the EU regulation and instead see a marketing advantage in complying with the International Organisation of Securities Commissions’ (IOSCO) Principles for Financial Benchmarks, said Gareth Parker, benchmark compliance consultant at Bovill London.
The upfront and continuing costs involved in being regulated by the EU legislation are the biggest deterrents for some of the Asian benchmark providers, who believe that complying with IOSCO’s principles will give them a starting point, according to Parker.
“In the EU, companies regulated under the European benchmarks regulation will have to pay a certain percentage of their revenues to the EU regulators, but if you follow the IOSCO principles the only ongoing cost is an annual restatement of compliance,” he said.
Endorsement or recognition
But the biggest reason that discourages Asian benchmark providers from seeking compliance with the EU benchmarks regulation is its onerous requirements. Even the other two options offered by the regulation — seeking endorsement and recognition from EU counterparts — present challenges.
Asian benchmark administrators that are considering the endorsement route would need to find administrators in the EU which are able to endorse their activity in the EU. These potential endorsers are likely to be competitors of the Asian benchmark administrators which will not have a strong interest to help the latter access the EU market, Parker said. Using the Hang Seng Index as an example, he said indices such as MSCI and S&P’s will see the Hang Seng Index as a competitor and so are unlikely to want to endorse Hang Seng in the EU.
Seeking recognition from EU regulators is equally challenging. It requires Asian benchmark providers looking to provide benchmarks in the EU to have a local partner run by people who can take on responsibilities for oversight over the benchmarks, and who have index expertise and knowledge of complying with the procedures to meet the EU regulation, Parker said.
An Asian benchmark provider needs to be able to find a European company which is willing to take on the legal responsibility, according to Parker.
“If someone in the EU feels that an Asian benchmark may be manipulated, they need to be able to sanction someone within the EU jurisdictions, hence the requirement for a legal representative within the EU,” he said.
But more often than not, the local setup of an Asian benchmark provider in the EU tends to be a sales office with no index experts.
“An Asian administrator won’t have the sort of expertise to say whether there is a problem with the index. The office is mostly a sales department. Are they going to shift a person with index expertise to the London or Frankfurt office? The answer is probably not,” Parker said.
Asian financial benchmarks regulations in the works
Aside from the Monetary Authority of Singapore (MAS) which looks set to introduce its financial benchmarks regime, widely anticipated to be this year, the Australian regulators are still deliberating whether to regulate their benchmarks, while Hong Kong regulators have so far been silent on this front.
Even though MAS is a frontrunner in this regard, many expect the EU regulators to take a while to assess Singapore’s financial benchmarks regulations before granting the equivalency ruling. The fact that Singapore’s financial benchmarks regulations only cover two benchmarks — the Singapore Interbank Offered Rate (Sibor) and the Singapore Swap Offer Rate (SOR) — will not help the other benchmark administrators in the city-state which are not involved in the two benchmarks, Parker said.
Mar 12, 2018 Patricia Lee, Regulatory Intelligence
Patricia Lee is chief correspondent, banking and securities regulation, Asia
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