Following President Obama’s intervention, the UK’s EU referendum debate last week stepped up a gear. And as the countdown to the June 23rd referendum gather pace, financial experts are turning their attention to the potential implications of a Brexit on what is arguably the UK’s most important commercial sector. A key question that must be answered before the vote is what impact a potential Brexit would have on the UK’s benchmarks market; as the EU is in the process of drafting the most significant set of regulations around benchmark administration seen to date.
All available evidence suggests that while a Brexit would change the UK’s relationship to Europe, and the relationship of UK businesses to EU regulations, it does not follow that the EU Benchmarks regulation will not still have a massive impact on financial trading in the UK. The European Securities and Markets Authority (ESMA), published a discussion paper earlier this year which provides advice on how non-EU benchmark administrators will be affected by the Benchmarks Regulation. Its advice states:
- Benchmarks provided by an administrator outside the EU can only be used within the trading block if they are subject to an equivalently stringent set of regulations overseen by a relevant authority. ESMA is currently in the process of drafting standards by which equivalence can be measured.
- Following an equivalence decision by the EU, non-EU benchmarks can only be used by firms in the EU once a formal cooperation arrangement has been coordinated with the relevant authorities in the third-party jurisdiction.
- While waiting for EU equivalence approval, non-EU benchmarks administrators can continue to provide benchmarks to EU firms providing they comply with some of the material requirements of the Benchmarks Regulation and establish a legal representative in the EU.
Following a Brexit UK regulators along with benchmark administrators would therefore need to work to ensure compliance with some or all of the EU Benchmarks Regulation in order to prove equivalence. From a buy-side perspective, a Brexit would most likely mean that firms would still see the cost of benchmarks increase (assuming benchmark administrators pass on the costs associated with achieving equivalence). For buy-side firms in Europe, there will also be additional complexity as they have to configure their data estate to take account of which benchmarks have achieved equivalence and when. There would be yet another moving part in the increasingly complex business of managing data within the buy-side.
To mitigate this uncertainty and help control costs, buy-side firms should consider managed services from companies such as RIMES. By leaving the management of benchmark data in the hands of experts, buy-side firms can rest assured that the benchmarks they use are fully compliant with all relevant regulations, no matter where in the world they are sourced.