The EU Benchmarks Regulation (BMR) has now been in force for a little over six months. This landmark regulation has put in place a stringent compliance regime for the administration and use of the benchmarks used in financial instruments and contracts in the EU. Prior to its enforcement, there was concern in the industry that the Regulation would lead to the widespread disruption of the benchmarks market. All the signs are that these fears were well founded.
As reported on Risk.net, this month has seen further benchmark market turbulence emerge as a result of BMR. LIBOR is at the center of this turbulence. It was widely held that BMR spelt the end for the benchmark, but it now seems possible that banks may continue to contribute to the benchmark after its planned end date in 2022. This so-called ‘zombie LIBOR’ adds confusion to the market and firms will be challenged by the lack of a clear trigger for when to fall back to an alternative rate.
Further challenges will arise from the withdrawal of Eonia, Europe’s overnight rate. An ECB expert panel warned its removal would likely cause disruption to the interest rate swap market and undermine derivatives valuation efforts. At worst, a sudden loss of Euribor could lead to serious financial stability issues.
It’s not only European benchmarks that are being overturned by BMR: key Asian benchmarks also face an uncertain future. The Korean won, Philippine peso and Taiwanese dollar fixings are currently incompatible with BMR. Unless changes are made, it seems likely they will be barred for use in the EU from 2020.
These are not mere ripples running through the benchmarks market: they promise profound change and, if not managed correctly, significant challenges to global financial markets. All firms that administer, contribute to or use benchmarks therefore need to act now.
First, firms need to understand whether they are a benchmark administrator under BMR and if so, what action they must take to be authorized or registered under the Regulation. The UK’s Financial Conduct Authority has sought to streamline this process, and its website provides some useful information for administrators.
Benchmark Users, meanwhile, need to stay on top of the fast-moving benchmarks landscape. The first step here is to inventory their benchmarks ecosystem to identify their risk exposure under BMR. If you are uncertain whether the indices you use as references are considered as benchmarks under BMR, you can take our questionnaire to find out.
Benchmark Users will need to keep an eye on market changes to ensure the benchmarks they use are current and authorized. The European Securities and Markets Authority has published a register to help with this task. Firms will also need to have in place a list of replacement benchmarks to fall back on in case of the sudden removal of a key rate. While this will help lessen the likelihood of widespread disruption to the financial markets, it does place yet another regulatory burden on firms.
Navigating the complexities of BMR and its resulting market turbulence will not be easy with rigid compliance systems and processes, while meeting the Regulation’s new requirements may prove costly if firms decide to increase headcount to cope. That’s why managed compliance services from providers such as RIMES are proving increasingly important. These new RegTech platforms will help firms seamlessly and cost effectively adapt to new regulatory challenges and provided the agility necessary to react to frequent change.
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