Regulations have a habit of changing course suddenly and, like the nasty new strain of a virus, can make life much more difficult for those who have to deal with them.
The EU Benchmarks Regulation (BMR) is superficially straightforward, but with enough complexity to cause vigorous head scratching from stressed compliance staff. The Brexit “variant” has not improved matters. At midnight in continental Europe, on the last day of 2020, all UK benchmark administrators were removed from the ESMA Benchmark Register and their benchmarks became third country benchmarks.
EU firms using UK benchmarks
Because of a transitional period in BMR, which extends until December 31, 2021, EU supervised entities are permitted to use a “third country UK benchmark” if the benchmark was already in use in the Union. This includes UK benchmarks deleted from the ESMA register, as well as UK benchmarks not authorized but in use at that time.
Theoretically, it should be fairly straightforward for an EU investment firm to check whether an index is authorized for use; simply go to the ESMA database and check whether it’s on the main Benchmarks Register or if it’s been listed as a third country benchmark.
Sadly, things are not so simple. At the time of writing, there are 73 benchmark administrators listed on the ESMA database. Only eight of these have individual benchmarks listed – and even then, it’s just a handful. To put this into context, the RIMES benchmark database contains several million individual indices. Putting it mildly, it’s a strong possibility that an individual benchmark may not be listed, even if the administrator is.
Assuming that a benchmark cannot be located on the main register it would hopefully be safe to assume that it could be found on the ESMA “Third Country Benchmarks” register. This is not the case. UK authorized administrators that are eligible to be treated as a “third country UK benchmark” provider are not listed in the register. Users will therefore need to also consult the FCA Benchmarks Register to check.
UK firms using non-UK authorized or registered benchmarks
The situation for UK regulated firms is largely similar to that described above: benchmarks listed in the ESMA Register are now treated as third country benchmarks. However, do not expect to find them listed as a third country benchmark on the FCA site. Users will instead need to consult both ESMA registers to determine whether an index is a third country benchmark that has been given a regulatory classification as Equivalent (under Article 30 of BMR), Recognized (under Article 32) or Endorsed (under Article 33).
Of course, users may simply rely on the transitional provisions and put off worrying about third country benchmarks for the time being. The UK adopted a more realistic approach in terms of the time allowed for third country benchmarks to meet the three types of regulatory standards noted above. HM Treasury, in a Policy Statement dated July 2020, proposed an extension to the transitional period for third country benchmarks to December 31, 2025. It also stated an intention to bring this measure forward at the next legislative opportunity. Additionally, the Policy Statement explained that the government “will also consider and operationalize potential changes to ensure an appropriate third country benchmarks regime for the UK”. Clearly the treatment of third country benchmarks is still a work in progress. The EU has subsequently followed suit with the EU Council proposing in October 2020 that it also extend its own transitional period to 2025 to ensure a consistent approach.
UK based firms using the indices of UK administrators will need to consult the FCA Benchmarks Register to check that the administrator is authorized or registered and that the benchmarks they administer can be used. Bearing in mind the comments above about the size of RIMES’ benchmark reference universe, it’s worth observing that the FCA Register currently has just 40 administrators listed, of which only 6 have individual indices against their name. Information from the register cannot be downloaded, making the checking process entirely manual.
Simon Green, Head of Compliance at RIMES, commented: “Compliance officers across the UK and EU are no doubt praying that the apparent lack of regulatory investigation into benchmark usage continues. However, the time will come when the rules are fully in force and the regulators come knocking.
“Our advice is for firms to prepare well in advance, so that they’re ready for the inevitable moment when a regulator launches a thematic review of benchmark controls. RIMES’ RegFocus BMR Control provides firms with a rapid, effective and above all simple to use managed service to take care of BMR compliance. By partnering with RIMES firms can avoid all the complexity of the regulation, freeing the time of compliance officers to focus on more valuable work.”
Contact us to receive more information about RegFocus® BMR, the most advanced benchmarks validation solution on the market, which solves all regulatory obligations under the new Benchmarks Regulation.
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