RIMES hosted a regulatory seminar on June 9th: EU 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 fourth session, Agathi Pafili, Senior Policy Advisor at EFAMA, discussed the implications of the EU Benchmarks Regulation for asset managers.
Agathi reiterated why the Benchmarks Regulation should be welcomed by the buy-side. First, the Regulation is an important step in restoring market credibility and confidence in benchmarks, and represents a good opportunity to increase transparency, and therefore financial stability. The Regulation also creates a platform on which the industry can ensure a level playing field for all market participants and brings legal clarity to benchmark user requirements.
EFAMA has been involved in negotiations around the text of the Regulation with a clear set of objectives in mind, namely: 1) that the Regulation should be proportionate to the requirements it imposes on different types of benchmarks, 2) it should focus on benchmarks most susceptible to manipulation 3) it should establish transparency on the benchmark costs borne by the end investors, and 4) the Regulation should allow investors to have access to a wide range of robust benchmarks.
The idea of proportionality is reflected in the final Regulation text, with a clear distinction in place between critical, significant and non-significant benchmarks. For Agathi, this was an important win for the buy-side, as asset managers will ultimately bear the additional costs the Regulation will bring with it. The grading of benchmarks in this way will ensure buy-side firms get value for money.
However, Agathi highlighted that the Regulation does not currently meet all of EFAMA’s objectives. Specifically, she does not believe it establishes full transparency on benchmarks costs; additionally, Agathi believes the jury is still out on whether investors will be able to continue to use benchmarks from third countries. Further work needs to be done on this area by ESMA and the Commission.
Agathi went on to outline the requirements for benchmarks users under the Regulation. First, supervised entities can use only benchmarks provided by an administrator complying with the Regulation; which they can check on the ESMA Register. Second, a Prospectus of an investment product referencing a benchmark must include information on the compliance of the benchmark administrator with the Regulation.
One of the key issues for asset managers is whether their activities blending benchmarks or creating bespoke benchmarks will make them liable under the stipulations for benchmark administrators. Agathi believes they should not. First, this is because bespoke benchmarks are not publically available, in that they are only offered to a restricted number of institutional investors. Any attempt by ESMA to expand this definition is believed incorrect by EFAMA.
Second, EFAMA has ensured that ‘use’ (as opposed to ‘administration’) of a benchmark was defined in the Regulation as the use of ‘an index or a combination of indices’ to understand the performance of a fund’. By this definition, Agathi believes asset managers which blend benchmarks should not be liable as administrators, as long as they do not input new input data.
What is clear from Agathi’s presentation is that while asset managers should welcome the Regulation, it brings with it additional complexities that will make data management within their organizations more difficult than ever. By working with managed services providers such as RIMES, asset managers can help reduce this complexity and the associated costs, while ensuring compliance.
For further information, please contact RIMES.