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.
In March 2017, ESMA published draft regulatory and implementing technical standards setting out the behaviours and standards expected of administrators and contributors. The EU Commission has three months to consider.
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!