RIMES hosted a regulatory seminar on June 9th: EU Benchmarks Regulation, Preparing for the Buy-Side Challenges. Experts from market participants and advisory firms presented to an audience of compliance managers on key elements of the legislation. Over the course of this five blog series, RIMES reports back on the main discussion points raised during these informative presentations.
Will Amos Partner, Risk & Regulation at PwC, the third speaker at our event, provided an overview of the EU Benchmarks Regulation including its background, what is changing and the main issues the buy-side needs to consider.
Will drew on his time spent as a regulator to remind the audience about the rate rigging scandals which precipitated the Benchmarks Regulation; highlighting that by undermining trust in benchmarks the scandals undermined trust in the entire financial system. As a result, the industry and regulators are now united in their efforts to ensure that a similar scandal does not happen again.
While most of the EU Benchmarks Regulation applies to the sell-side, Will spent time discussing the significant implications for the buy-side. One of the key aims of the Regulation is to address data accuracy by ensuring benchmark administrators can improve the quality of input data and methodology. For Will, buy-side firms should try to match this focus on data quality. In particular, firms should conduct due diligence of their own to ensure the data they receive from administrators is correct and compliant.
As Will pointed out: the Regulation ultimately aims to protect end consumers of financial products; the buy-side’s direct clients. As such, the buy-side has a duty as a customer agent to monitor market data and play an active role in ensuring the quality of benchmark data. Will went on to outline what he sees as the other major likely effects of the Regulation on buy-side firms.
The first is cost. The increased burden of regulation on benchmark administrators could well lead to increased costs associated with benchmarks; costs which may ultimately be borne by the buy-side. Second, there is also a real risk to innovation. The Regulation will make it more complicated to use third-country benchmarks and it is possible some firms might choose to develop fewer products to avoid having to use such benchmarks and taking on the associated due diligence burden. Finally, buy-side firms need to understand whether their data management capabilities will be able to cope with the additional requirements of the EU Benchmarks Regulation, alongside other regulations including EMIR, AIFMD and MiFID II.
Based on his knowledge of how the regulator will approach the new market conditions following implementation of the Regulation, Will believes buy-side firms need to become more proactive in monitoring market data and ensuring products are priced in a way investors will expect. This will involve a greater focus on how data is used across the organization and by sell-side partners. This is a significant piece of work and Will encouraged buy-side firms to start planning immediately to avoid shocks further down the line.
This is a message RIMES agrees with wholeheartedly. Moreover, we believe the managed data services offered by RIMES are well suited to meeting many of the challenges identified by Will; helping firms update their data management and compliance capabilities at speed and at low cost.
For further information, please contact RIMES.