EU Benchmarks Reform and Proprietary Indices

RIMES hosted a regulatory seminar on June 9thEU Benchmarks Regulation, Preparing for the Buy-Side Challenges. Experts from market participants and advisory firms presented to an audience of compliance managers on key elements of the legislation. Over the course of this five blog series, RIMES reports back on the main discussion points raised during these informative presentations.

In the second session, Will Dibble, Partner in the Financial Services & Products Group of CMS Cameron McKenna LLP, discussed the impact of benchmark reform on proprietary and bespoke indices.

Will believes that some proprietary indices might fall outside the scope of the EU Benchmarks Regulation’s definition of indices, and so will not be bound by the Regulation. Will looked at the fact that the Regulation defines an index as any figure used to measure the performance of an investment fund and which is ‘published or made available to the public’.

Will shared a draft technical guidance from ESMA to define what is meant by the term ‘made available to the public’:

  1. The index is accessible by a large or potentially indeterminate number of recipients
  2. The index is provided or is accessible to one or more supervised entities to allow the use of the index…and through such use the index becomes accessible to an indeterminate number of people

Will highlighted the ambiguities implicit in the term ‘large’, used in the first definition. Transferable securities could, for example, be split between an indeterminate number of recipients; meaning it falls within the Benchmarks Regulation definition. Non-transferable, bi-lateral contracts, however, would most likely not be liable.

The second definition is interesting because the term ‘allowing the use’ implies that index providers can specifically prohibit the use of their indices for anything that would fall within the EU Benchmarks Regulation, again removing the need to be compliant. It seems therefore that proprietary index providers may be able to limit their liability to the Regulation through contract stipulations.

Will then looked at whether restrictions on access to an index might help ensure it is not ‘made public’. Importantly, ESMA has made clear that mode of access is irrelevant: if an index is password protected, for example, it will still fall within the definition of ‘made public’. Also, if an investor can ascertain an index value from coupons, strike prices, differentials or the values of financial instruments the index is viewed as having been publically disseminated and as such falls under the Benchmarks Regulation.

Finally, Will highlighted that proprietary and bespoke benchmarks are unlikely to be categorized as ‘critical’ benchmarks under the Regulation. As a result, there are a lighter set of measures to comply with. Importantly, to the extent that an administrator chooses not to comply with the full requirements, they must publish and maintain a compliance statement which shall clearly state why it is appropriate for that administrator does not to comply with those provisions. The technical standards of this statement are, however, yet to emerge.

The EU Regulation will not, therefore, automatically apply to each and every proprietary or bespoke index, but such index providers must investigate for themselves the extent to which they will need to comply. RIMES’ advice to buy-side companies using proprietary and bespoke indices is to conduct their own due diligence to ensure the indices they use are compliant; the buy-side can no longer afford to leave data compliance solely in the hands of the sell side.

For further information, please contact RIMES.

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