EU Benchmarks Regulation: Coping with Market Disruption

The EU Benchmarks Regulation (BMR) has not yet come into force, but it is already apparent that the legislation is having a transformational effect on the benchmarks market. Buy-side firms that use indices as benchmarks in financial instruments and contracts will need to put in place processes and measures to ensure they can weather what will be very turbulent times ahead.

BMR mandates an exponentially more stringent compliance regime for firms that administrate and contribute to benchmarks used in the EU. Benchmark administrators, for instance, will, amongst other things, need to set up an oversight function to ensure the benchmarks they produce are not affected by any existing or potential conflict of interest, and that they have in place a clear organizational structure with transparent and consistent roles for those involved in the provision of a benchmark.

What is becoming increasingly clear is that some administrators may choose to simply withdraw their benchmarks from the market rather than spend the time and expense involved in compliance. In fact, with more than three months to go before the enforcement of BMR from January 1, we are already seeing major benchmark providers signal their intent to withdraw their benchmarks. This includes the LIBOR rate, the rigging of which in part gave rise to BMR, and which is set to be withdrawn by 2021.

Significantly, there are also indications that non-EU benchmarks may also be withdrawn. BMR states that benchmarks from third-country providers must be governed by equivalent standards to BMR, and for some providers meeting these obligations may not be worth the trouble. For example, there is some speculation that Hang Seng Indexes may choose to withdraw the Hong Kong Stock Exchange Hang Seng China Enterprises Index rather than meet the demands of BMR.

Buy-side firms that use benchmarks therefore face a more turbulent and unpredictable market than at any time in the past. Importantly, BMR recognizes the fact that benchmarks may be withdrawn following its implementation and therefore demands benchmark users have in place a list of equivalent, replacement benchmarks to ensure that the impact of benchmark withdrawal on the financial markets is limited. Significantly, the benchmark user is burdened with the task of ensuring these replacements are from benchmark administrators that are authorized under BMR and compliant with the regime.

If buy-side firms are to have the list in place before January 1 they must act now. However, many firms do not have the expertise, time or resources to extensively research the benchmarks market to build a list of alternatives. Moreover, any such work must begin with a full inventory of all existing benchmarks used by the firm, which is in itself a complex and time-consuming piece of work.

If firms are to ready themselves for BMR, it is therefore becoming clear that they will need to use a specialist service, from specialist provider such as RIMES, which can leverage cloud technology to help them inventory their benchmarks ecosystem much more rapidly than they would be able to alone. Additionally, they can benefit from immediate access to a pre-qualified list of replacement benchmarks, ensuring that they are not only compliant with BMR, but also able to navigate any market disruption with ease.

To receive more information about RegFocussm BMR, the most advanced benchmarks validation solution on the market which solves all regulatory obligations under the new Benchmarks Regulation, please contact us.

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