On December 14, the European Securities and Markets Authority (ESMA) published updates to its Q&A on the EU Benchmarks Regulation. The Regulation, which comes into force on January 1 next year, establishes a more stringent regime for the administration of indices used as benchmarks in financial instruments and financial contracts, or to measure the performance of investment funds. The Regulation demands a step-change in compliance for all stakeholders in the European benchmarks market. In its Q&A document, ESMA seeks to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of BMR by providing responses to questions asked by the public, financial market participants, competent authorities and other stakeholders.
With just days remaining before BMR’s ‘go-live’ date, ESMA’s latest updates focus on benchmark Administrators and benchmark Users. The first update concerns the requirements of Administrators with regards to authorization and registration. The Q&A makes it clear that EU index providers are required to comply with the obligations laid down in the BMR only at the time of authorization or registration (i.e. they do not need to do so before they seek registration or authorization).
The second update concerns requirements for Users of benchmarks: buy-side firms such as asset managers, banks and insurance companies. In the Q&A, ESMA states that as of January 1, 2018, supervised entities (i.e. benchmark Users) are required to have “robust written plans for cessation or material changes of a benchmark, and to reflect them in the contractual relationship with clients”.
This second update should be particularly concerning for buy-side firms. It means that in a matter of days, all such firms need to ensure they can “produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark they are using materially changes or ceases to be provided”. When it comes to reflecting these plans in contractual relationships, EMSA states that this applies to all new contracts from January 2018, but firms should also look to amend existing contracts “where practicable and on a best-effort basis”.
This really is crunch time for benchmark Users in the EU. Firms that have not yet acted to ensure compliance should delay no longer. Given the timeframes involved, the best course of action is to work with managed ‘RegTech’ service providers, such as RIMES. These providers can offer compliance tools as-a-service, so firms can make the changes demanded by BMR immediately and at low cost. This approach will ensure that firms can manage risk stemming from the new Regulation while maintaining business as usual.
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