With the EU due to start enforcing its Benchmarks Regulation (BMR) from January 1, 2018, the clock to compliance is fast counting down. In these series of articles, we are looking at what BMR means for asset managers, servicers and insurance companies, drawing on the discussions that took place at the recent RIMES BMR Seminar.
This year’s event was opened by Bruno Piers de Raveschoot, COO of RIMES’ Regulatory Division. Summarizing six months’ worth of discussions with legal advisors, clients and regulators across the UK and Europe, Piers de Raveschoot set out to provide some important information around how the law is being interpreted, based on ESMA’s recently issued Regulatory Technical Standards (RTS).
Piers de Raveschoot reminded the audience attending the event that BMR allows firms to continue using benchmarks that have been created before January 1, 2018 for two years, and as a result only immediately applies to new benchmarks. However, Piers de Raveschoot stated that what constitutes a new benchmark remains unclear, and no clear definition is yet in place. For Piers de Raveschoot, this fact highlights the complexity of the challenge facing asset managers.
However, the impending implementation of BMR means that firms must do all they can to comply. The first step is for firms to understand whether they will be affected by the Regulation. To do this, Piers de Raveschoot identified some key questions asset managers must ask themselves with regards to the indexes they use:
- Is the index used to determine the value of a fund?
- Is the index used to define the asset location of a portfolio?
- Is the index used to calculate performance fees of a fund?
- Does the index help determine the amount payable under a financial instrument?
- Is the index used to determine the value of a financial contract?
- Is the index used to determine the value of a financial instrument?
If a firm answers ‘yes’ to one or more of these, their index is benchmarked, and therefore regulated by BMR. Significantly, under BMR, blend and custom indices used for one of these purposes are also considered a benchmark.
RIMES has put together an easy to use BMR Checklist questionnaire for you to understand how you may be affected by the BMR.
Piers de Raveschoot then made the point that some firms will have trouble understanding whether they are benchmark administrators, contributors or users under the terms of BMR, and so are not aware of their exposure to the legislation.
One challenge in this respect stems from the fact that some benchmark users don’t know what they are intended for, and may even transform these benchmarks. This activity would in effect render that user an administrator. To overcome this challenge, Piers de Raveschoot suggested that firms start an inventory of their benchmarks to understand fully which benchmarks are being used and how they are being used, as this information will help firms understand their responsibilities under BMR. For example:
Benchmark users must:
- Ensure the supplier of your benchmark is a registered administrator under BMR.
- Ensure the benchmark is administrated by an official administrator based in the EU.
- Ensure you have robust plans in place to substitute a benchmark in the case of material change to or cancellation of a benchmark.
For firms that are also benchmark administrators the obligations under BMR are much more comprehensive and require building a complete oversight function to ensure that the many complex stipulations of the legislation are adhered to.
One way for businesses to overcome the challenges of BMR implementation is to take advantage of new RegTech solutions being developed by the market. RIMES is currently working on a range of solutions to meet the challenges faced by benchmark users and administrators; delivering everything from BMR risk assessment, regulatory fulfilment and administrative functions as a managed service. This approach will solve the operational complexity of BMR for buy-side firms at the low cost points associated with managed services.
To view Piers de Raveschoot’s presentation in full, click here.