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.
In the UK, we already have rules for certain benchmark activities – the regulated activities of providing information in relation to a specified benchmark and administering a specified benchmark were introduced in April 2013. The European Benchmark Regulation will supersede the existing FCA rules and affects a wider set of firms.
What is a Benchmark?
In simple terms, the regulation will capture those benchmarks that are referenced in (1) financial instruments traded on trading venues, (2) mortgage and consumer credit contracts or (3) used to measure the performance of investment funds. This is potentially very wide.
Who is affected?
The EU Benchmark Regulation will impose obligations on three categories of firms:
- Benchmark administrators. The regulation will require the authorisation or registration of benchmark administrators, who will then be 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, will no longer be 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.
Timeline for Implementation
On 29 June 2016, the Regulation was published in the Official Journal of the EU (OJ). It applies from 1 January 2018, with the exception of certain provisions (specified in Article 59) that applied from 30 June 2016, and one provision that applied from 3 July 2016.
On 16 November 2016, ESMA published its final technical advice to the European Commission on several key aspects of the future rules for benchmarks. This document provides advice on:
- how benchmarks’ reference values can be calculated by using data reporting structures under existing EU rules such as MiFID II and EMIR;
- some of the criteria for deciding when third country benchmarks can be endorsed for use in the European Union (EU); and
- what constitutes making a benchmark figure available to the public.
In addition, ESMA is also consulting on the draft regulatory technical standards and implementing technical standards. The consultation is organised in ten chapters, each dedicated to one of the areas for which the Benchmarks Regulation requested ESMA to develop draft technical standards, namely:
- procedures, characteristics and positioning of oversight function
- appropriateness and verifiability of input data
- transparency of methodology
- specification of elements of the code of conduct of contributors
- governance and control requirements for supervised contributors
- specification of qualitative criteria for significant benchmarks
- template for compliance statement for significant/non-significant benchmarks
- contents of benchmark statement
- information to be provided in applications for authorisation and registration and
- form and content for the application for recognition by third country administrators.
After considering the responses, ESMA will finalise the draft technical standards and submit them to the European Commission before 1 April 2017.
The new legislation creates a host of new requirements for administrators, contributors and users of benchmarks. Certain firms will have to create internal systems to govern, control, monitor and record the processes by which benchmarks are calculated and distributed.
Users should make sure they are aware of which benchmarks they use, and seek assurances from the administrators and verify that they have plans to comply with the Regulation. This is particularly important where the benchmarks are provided by smaller administrators, especially in third countries.
Secondly, users should start thinking now about potential alternative benchmarks in case any benchmark they currently use becomes unavailable.
Bovill’s experts are ready to guide you through the legislative process and ensure that your firm is prepared. There has never been a better time to set the benchmark for proactive compliance!