On November 8, the European Securities and Markets Authority (ESMA) published a new update to its Q&A on the EU Benchmarks Regulation (BMR). The Q&A is produced by ESMA to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of BMR, which will transform the benchmarks regulatory landscape in the EU and beyond. BMR ushers in a stringent compliance regime for the administration and use of benchmarks used in financial instruments and contracts to crack down on market manipulation and rate rigging.
ESMA’s latest update focuses on the application of BMR outside of the EU, as well as the transitional provisions applicable to third country benchmarks. ESMA clarifies that non-EU benchmarks that have been in use in the Union prior to January 1, 2020 can continue to be used after that date. However, new use of such benchmarks after January 1, 2020 will not be allowed unless the administrator has taken the necessary steps to authorize the benchmark under BMR.
ESMA has also made it clear that benchmark providers in the EU that provided benchmarks before July 1, 2016 will be allowed to launch new benchmarks prior to being authorized or registered under BMR, until January 1, 2020.
Finally, ESMA has taken the opportunity to state unambiguously that BMR does not apply to the provision of benchmarks that are exclusively used outside the bloc.
This latest document provides welcome clarification for buy-side firms that use benchmarks from non-EU sources ahead of BMR coming into force on January 1, 2018. However, BMR is a highly complex piece of legislation, its full consequences may not become apparent until next year.
For instance, while the new use of many existing non-EU benchmarks will only be banned from 2020, it is possible that some benchmark administrators may choose to withdraw them earlier. Not only does it make good business sense for buy-side firms to be ready for this eventuality, but BMR explicitly requires benchmark users to be ready with substitute benchmarks in the event of market withdrawal.
In order to avoid any unwelcome shocks after January 1, our advice to buy-side firms is to fully audit your benchmark inventory as soon as possible to understand which benchmarks will be regulated under BMR and to build a list of substitute benchmarks for compliance purposes. Additionally, firms that blend benchmarks may be considered benchmark administrators and subject to other, more stringent regulations. It is critical to understand your position with regards to BMR in depth and prepare accordingly.
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