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ESMA Publishes Framework to Protect Critical Benchmarks

One of the main concerns of the impending EU Benchmarks Regulation (BMR) for buy-side firms, is that it will effectively limit the availability of benchmarks on the market. The fear is that the rising costs and compliance burdens of BMR will cause banks to withdraw their contributions to benchmarks. As a result, many key benchmarks may cease to exist, while others may increasingly fail to reflect market realities. This concern is well founded: EURIBOR has seen the number of contributing banks shrink to 20 – a decrease of 20 over just five years – as a result of concerns about regulatory compliance.

Significantly, the European Securities and Markets Authority (ESMA) has started to take action to address this threat – at least in so far as critical benchmarks are concerned. Earlier this month, ESMA published a framework to assist national competent authorities (NCAs) in their selection of banks to be compelled to contribute input data to any critical benchmark in danger of becoming unrepresentative. The framework applies to all Interbank Offered Rates (IBORs) and to the Euro OverNight Index Average (EONIA), and represents an important step forward in developing NCA’s compulsion powers for critical benchmarks.

The launch of ESMA’s framework is welcome news for the buy-side, as it helps bring a level of certainty that benchmarks critical to their activities will remain available in the BMR regime. However, many asset managers rely on smaller, niche benchmarks, and it remains unclear how these will be protected – if they will be protected at all – one the Regulation has been implemented. If asset managers are to ensure the continuity of their operations following the implementation of BMR on January 1, 2018, it is therefore critical they keep abreast of the rapidly changing benchmarks market.

This will not be easy, however. BMR brings with it a new level of complexity to the benchmarks market, and most firms will need to upgrade their data management capabilities to ensure the benchmarks data they use is fit for purpose, and from administrators that are compliant with the Regulation. In this environment, the business case for managed data services – such as those offered by RIMES – becomes stronger than ever.

Managed data service providers do all the heavy lifting for buy-side firms through easy to use, cloud-based services that reduce the cost of data management and ensure data quality throughout the workflow. As the full impact of BMR becomes apparent, firms that use managed data services will quickly find themselves at a competitive advantage.

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