Clearing the BMR Fog: Some Key Clarifications

As a large-scale and highly complex piece of legislation, much uncertainty has remained around the EU Benchmarks Regulation (BMR), particularly as it applies to asset managers. In his talk at the recent RIMES BMR Seminar in London, Will Dibble, Partner Financial Services and Products Group, CMS Cameron McKenna Nabarro Olswang LLP, set to provide some important clarifications. These clarifications are essential, as they will help asset managers, servicers and insurance companies identify whether their activities fall under the scope of Regulation.

This is the second time Will Dibble has presented at the RIMES BMR Seminar, having participated in our inaugural event last year. In the intervening 12 months, The European Securities and Markets Authority (ESMA) has published technical standards and Q&A documents which have shed further light on how BMR will apply in practice.

One of the key areas for clarification is in what constitutes an index for the purposes of BMR. Dibble advised that firms need to be careful in that even a strategy can fall under the definition of an index if the former achieves the same goal as the latter. Similarly, embedding this information in the terms and conditions of a contract in no way alters the fact that the strategy is functioning as an index, and therefore falls under the remit of BMR. Dibble warned that this is an area where firms might find themselves in difficulties: if the level of an index can be extracted from coupons, terms and conditions and other similar information it will leave the asset manager exposed to BMR.

One of the other areas in need of clarification is what it means to make a benchmark ‘available to the public’. Having raised this issue last year, Dibble provided an update based on ESMA’s viewpoint. Previously, ESMA stated that to be considered ‘made public’, a benchmark needs to have been made available to a ‘large or potentially indeterminate number of people’. The final RTS has taken out reference to ‘large’. This is important because it means that that if a product can be transferred from one individual to another, ad infinitum, it falls under this definition.

Dibble also discussed a significant change to the way in which ESMA defines ‘dissemination’ of a benchmark. Previously, ESMA had concluded that the dissemination of index values to a wider public through their incorporation into coupons, strike prices, differentials and other economic data could mean that the index is in effect being published. ESMA has now qualified this conclusion by stating that it will only be considered ‘publishing’ if one can directly extract the index level from the disseminated data.

Dibble then made the point that for any economic data to count as an index, it needs to be ‘regularly determined’, but there is no guidance on what this means. Dibble suggested that ad hoc measures, such as when a firm has a one-off instance where they inform a client of an index level, would not classify as being ‘regularly determined’ for the purposes of BMR. On the other hand, any regular activity, including bespoke payments such as coupons, would be considered ‘regularly determined’.

To conclude his presentation, Dibble made some interesting points around the different ‘roles’ covered BMR: ‘administrator’, ‘contributor’ and ‘user’. While these roles are conceptually quite distinct, they in fact often blur. A user, for example, is in the first place a contributor. What’s more, outsourcing is permissible and even anticipated under BMR. This is important when it comes to the roles and definitions of what constitutes an administrator, and ESMA is clear that agreements should be made from the outset about who is and is not the legal administrator of a benchmark.

What is apparent from Dibble’s presentation is that today, just six months short of the enforcement date of the legislation, buy-side firms need to act now to understand whether their activities would place them under the stipulations of BMR.

To see Dibble’s presentation in full, click here.

RIMES has put together an easy to use BMR Checklist questionnaire for you to understand how you may be affected by the BMR.

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