Financial benchmarks play an integral role in global capital markets and regularly determine borrowing costs for the average consumer. So it is no surprise that the manipulation of the LIBOR and EURIBOR rates, which resulted in billions of pounds in penalties and an ongoing criminal investigation, led to increased regulatory scrutiny.
Failures in, or doubts about, the accuracy and integrity of indices used as benchmarks may undermine market confidence, cause losses to consumers and investors and distort the real economy. It is therefore considered necessary that, on a pan-European basis, action is taken to ensure the accuracy, robustness and integrity of benchmarks and the benchmark setting process.
What is a Financial benchmark?
In simple terms, the regulation captures those benchmarks that are referenced in
- financial instruments traded on trading venues,
- mortgage and consumer credit contracts or
- used to measure the performance of investment funds.
This is potentially very wide.
Who is affected by financial benchmarks?
The EU Benchmark Regulation imposes obligations on three categories of firms:
- Benchmark administrators. The regulation requires the authorisation or registration of benchmark administrators, who are subject to supervision against the requirements in the regulation. These requirements, cover areas such as governance, controls, oversight and accountability.
- Benchmark contributors. The regulation includes provisions that apply to all contributors (regulated or not), together with additional requirements for regulated contributors.
- Benchmark Users. This includes credit institutions, investment firms, insurers, reinsurers, UCITS, AIFMs, central counterparties and trade depositories. Users who are regulated entities, are no longer allowed to use a benchmark–unless it is provided by an authorised or registered administrator in the EU or, in the case of third countries, the third country administrator has been recognised or the benchmark has been endorsed. This will be of concern to those who use third country benchmarks. It should be noted that whilst this obligation applied from 1 January 2018, there are some transitional provisions which provide relief for existing financial benchmarks.
Timeline for Implementation
The Benchmark Regulation came into effect on 1 January 2018. Don’t forget to keep an eye on the ESMA Q&As.
The new legislation creates a host of new requirements for administrators, contributors and users of benchmarks. Our financial benchmarks experts are here to guide you through the legislative process and ensure that your firm is prepared. Get in touch to find out more.