Benchmark regulations – are you affected?
11 May 2017
The LIBOR and FX fixing scandals undermined the reputation of global financial markets. As a direct consequence, UK and European regulators have focused upon corporate governance and culture as a means of improving standards of conduct and restoring trust in financial markets. In addition, the administration of and submission to Benchmarks has become a regulated activity for the first time.
Initially amendments were made to MAR 8 of FCA’s handbook, which regulates eight benchmarks which have been specified by the Treasury. However a much more significant step in this direction has come in the form of the EU Regulations on indices used as benchmarks.
The Regulations apply to Administrators of, Contributors to and Users of Benchmarks. The Regulations apply to a much wider population of Benchmarks than are currently captured by MAR 8. The regulations are, as always, complex and open to interpretation.
In summary, the EU Benchmarks Regulation defines an index as a figure that is publicly available and is regularly determined, either by applying a formula to or making an assessment of a representative set of underlying data. A Benchmark is an index by reference to which the amount payable and/or the value of a financial instrument or contract is determined. There are likely to be more than 150 administrators of Benchmarks and a significant multiple of that who are submitters to, or users of, Benchmarks.
A benchmark administrator provides indices that are used in:
- financial instruments traded on trading venues or via systematic internalisers in the EU
- mortgage or consumer credit contracts or
- investment funds.
Administrators are required to ensure there is robust governance in place to ensure the methodology is appropriate, the calculation is accurate and that actual and potential conflicts of interest are managed properly. In addition, they must implement appropriate controls over the quality and retention of input data as well as establishing a Code of Conduct for Contributors to comply with.
A contributor under the Regulation is an authorised person who:
- contributes input data that is not readily available to the administrator, and
- provides the input data for the purpose of a benchmark determination.
Contributors must ensure that conflicts of interest which arise in the process of contributing are properly identified and managed. In addition, contributors are required to comply with the Code of Conduct for contributors which are established and overseen by Administrators.
Benchmark users may be subject to additional requirements if they are authorised persons and they:
- issue a financial instrument that references an index
- determine the amount payable under a financial instrument or a mortgage or consumer credit contract by referencing an index
- are a party to a mortgage or consumer credit contract that references an index
- provide a borrowing rate calculated as a spread or mark-up over an index or a combination of indices and that is solely
- used as a reference in a consumer credit contract to which the creditor is a party
- measure the performance of an investment fund through an index either to track the return of the fund or to define its asset allocation.
Users of Benchmarks in the EU must ensure the benchmark administrators are authorised or, if based in a third country, registered (and therefore deemed equivalent) by the FCA (or other EU Competent Authority). In addition, they must ensure the Benchmark itself is fit for purpose and does “what it says on the tin”.
Firms who act as Administrators of Benchmarks must make strategic decisions to balance the benefits of administering the Benchmark against the costs associated with the new regulations. The discontinuation of benchmarks will have repercussions for their users who will have to ensure appropriate contingency measures for such an event are in place.
The regulation is extremely complex and there are implications for administrators, contributors and users, all of whom must certify to the FCA their compliance with the new regime.
For more information on benchmarks please get in touch with our expert team.