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ESMA Publishes Advice for Future Rules on EU Benchmarks Regulation

On November 10, Christian Fauvelais, co-founder and CEO of RIMES, joined a meeting convened by the European Securities and Markets Authority (ESMA) as it finalised its technical advice around the EU Benchmarks Regulation. The Regulation came into force on June 30 this year and aims to ensure that benchmarks are produced in a transparent and reliable manner.

While the Regulation primarily impacts benchmark administrators on the sell-side, ESMA’s final technical guidance includes conclusions that will affect buy-side benchmark consumers. Two are of particular relevance: first, what constitutes making a benchmark figure available to the public; and second, the criteria for deciding when third country benchmarks can be endorsed for use in the EU.

In its definition of a benchmark, the Regulation presupposes that the index value must be made available to the public to count as such. This definition has caused some concern amongst the buy-side community, as many create blended benchmarks and provide them to clients. This activity could fall under the definition of making an index available to the public and therefore make buy-side firms subject to the Regulation.

In its advice, ESMA states that ‘making available to the public’ should mean the ‘index value is available to a potentially indeterminate number of persons outside of the index provider’s legal entity’. Significantly, ESMA also states that where an investor can isolate an index value from incorporation into coupons, strike prices, differentials, and values of financial instruments and investment funds referencing it, the respective figure should be considered ‘made available to the public’.

Despite ESMA’s latest advice, uncertainty therefore remains over the implications of the EU Benchmark for buy-side firms, especially those that blend benchmarks. Firms should be aware that they might be liable under the Regulations when the final rules come into force in January 2018.

When it comes to criteria for deciding whether third country benchmarks can be endorsed in the EU, ESMA has provided a non-exhaustive list of criteria that national regulators should consider. These include objective reasons for the provision of a benchmark in a third country, and objective reasons for the endorsement of a benchmark’s use in the EU.

As benchmarks from administrators in third countries will need to demonstrate some sort of parity with the stipulations of the EU Benchmarks Regulation to be used in the EU, these criteria are important. Firms that use third country benchmarks should be aware that some of these might not be endorsed for use in the EU and should instead seek alternatives.

ESMA’s latest advice is another important milestone in the rollout of the EU Benchmarks Regulation. This regulation is adding cost and complexity to the creation of benchmarks and the use of benchmarks by the buy-side. However, managed data services such as those provided by RIMES can help mitigate this cost and complexity and help buy-side firms adjust.

Increased regulatory oversight is the new normal, but with managed data services there is no reason this should limit buy-side firms’ ability to operate effectively.

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