On February 25, there was yet another twist in the ongoing Benchmarks Regulation (BMR) saga as the EU institutions agreed to grant administrators of Critical benchmarks, such as Euribor and Eonia, an additional two years to achieve compliance with the new Regulation.
Critical benchmark administrators in the EU now have until December 31, 2021 to achieve authorization under the new regime and register with ESMA. The two-year extension also applies to financial benchmarks administered outside the EU.
Given the potential harm that could have been caused to financial markets by the precipitous withdrawal of Critical and third-country benchmarks, the EU’s move will no doubt be welcomed by financial sector firms. The extension should now give benchmark administrators around the world enough time to adjust to the new regulatory framework.
However, there are two notes of caution to be struck here. The first is around the scope of the extension period, as the statement issued by the EC announcing the extension makes no reference to either Significant or Non-Significant benchmarks. Significant benchmarks are those where the value of underlying contracts is at least €50 billion, or where there are no or very few market-led substitutes. Meanwhile, Non-Significant benchmarks are those where the underlying contracts are valued at less than €50 billion, and the benchmark is not a commodity or interest rate benchmark.
In lieu of further clarification, it must be assumed that BMR currently actively applies for all new Significant and Non-Significant benchmarks and will apply from January 2020 for all Significant and Non-Significant benchmarks that were in place before BMR was written into EU law.
Administrators of such benchmarks must therefore act immediately to ensure they are compliant. Users of Significant and Non-Significant benchmarks, meanwhile, should ensure they have in place a mechanism for mapping relevant benchmarks used in their operations against those that have been approved under BMR in order to avoid non-compliance.
A second area of concern is that the extension period provides no real certainties around third-country benchmarks. Administrators in third-countries have already had a long time to prepare for BMR and most have not done so. This is because for many the costs and complexity of compliance are prohibitive and some may still decide to simply withdraw their benchmarks after this latest extension period has expired.
So, while the EU’s decision provides some more time to ready new risk-free rates to replace Euribor and Eonia, it’s critical that benchmark users keep up their preparations for BMR. There remains a clear and immediate compliance obligation for benchmark users and administrators around Significant and Non-Significant benchmarks. Moreover, continued uncertainty around what the benchmarks landscape will look like in 2021 means benchmark users must ready themselves now for all future eventualities.
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