The EU Benchmarks Regulation is having an impact beyond the EU’s borders – including in US firms that sell financial products in the EU, use European benchmarks in their financial instruments and contracts, or which administer benchmarks that are used in the EU.
Broadly speaking, the obligations that fall on US firms are:
- Benchmark administrators will need to be authorized and register with the European Securities and Markets Authority (ESMA). These firms will have demonstrated they have put in place sufficiently robust controls around their benchmark methodologies.
- Benchmark users will need to put in place internal controls to ensure that the benchmarks used in their financial instruments and contracts within the EU are authorized. Additionally, firms will need to ready a list of substitute benchmarks to be used if a legacy benchmark is withdrawn from the market.
Given the fast-changing nature of the regulation, US firms may be uncertain as to which elements are already in force. There are three key updates to be aware of in this regard:
- Impact: For US firms, one of the biggest impacts of the regulation is that the Financial Conduct Authority in the UK has decided to abandon the LIBOR rate. From 2021, all firms that use LIBOR will need to transition to a new risk Free Rate, likely to be SONIA.
- Scope: Today, only European index providers need to be authorized. Third-country benchmarks that are used in the EU – including those from US-based administrators – will be regulated from December 31, 2021.
- Governance: The required governance and methodology around benchmarks may be far from settled. ESMA is running a consultation around the proposed draft Regulatory Technical Standards covering the governance of administrators, methodology of benchmarks, reporting of infringements, mandatory administration of critical benchmarks and the compliance statement.
Scott Burke, VP, Regulatory Product Manager RIMES commented: “To help firms navigate uncertainty stemming from the Benchmarks Regulation, we provide a comprehensive range of compliance tools under the RegFocus BMR Control brand. These tools allow firms to understand fully their universe of benchmarks and their risk exposure under BMR. Our services take the strain of monitoring for BMR compliance in a fluid regulatory environment, allowing clients to focus on their core investment and distribution activities.”
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