On 9 December 2015, the Permanent Representatives Committee approved, on behalf of the European Council, a compromise agreed with the European Parliament on new rules aimed at ensuring greater accuracy and integrity of benchmarks in financial instruments.
The regulation has the following objectives:
- Improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately;
- Improving the quality of input data and methodologies used by benchmark administrators;
- Ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest;
- Protecting consumers and investors through greater transparency and adequate rights of redress.
The regulation will now be submitted to the European Parliament for a vote at first reading, and to the Council for final adoption.
The regulation provides rules for three categories of benchmark appropriate to their size and nature:
Critical benchmarks: Those used as a reference for financial instruments or financial contracts or for the determination of the performance of investment funds having a total value of at least €500bn on the basis of all the range of maturities of the benchmark; or benchmarks based on submissions by contributors mainly located in one member state and recognized as being critical in that member state. Benchmarks of at least €400bn can also be considered critical if they have no or very few appropriate market-led substitutes, and if their absence would have significant and adverse impacts on markets integrity, financial stability, consumers, the real economy, or the financing of households and corporations.
Significant benchmarks: Those used as a reference for financial instruments or financial contracts or for the determination of the performance of investments funds having a total average value of at least €50bn on the basis of all the range of maturities or tenors of the benchmark over a period of six months. Benchmarks below this threshold can be upgraded if they have a significant impact on the markets, with no or few market-led substitutes.
Non-significant benchmarks: Are subject to a light regulatory regime based on a comply-or-explain mechanism, i.e. general principles in line with the internationally agreed IOSCO principles.
Specific regimes will apply to commodity, interest rate and regulated data benchmarks:
Commodity benchmarks of more than €100m are subject to the principles for oil price reporting agencies (PRA) issued by the IOSCO on 5 October 2012. These principles serve as a global standard for regulatory requirements for benchmarks. They were endorsed by the G20 in 2012 and cover governance structures, controls, integrity, and conflict management.
Interest rate benchmarks, which are more prone to conflicts of interest and data manipulation, are subject to additional requirements relating to input data and contributors as these benchmarks.
Regulated data benchmarks are exempt from some requirements as the nature of the data that is used in the determination of such benchmarks is less subject to manipulation and conflicts of interest.
The compromise text is the result of three years of negotiations and following the global scandals of numerous key benchmarks, there is a political desire to finalize their rules for supervision. With this in mind, firms involved in benchmark activities should now read the text and formulate their roadmap to regulatory compliance.
The compromise text of the Benchmark Regulation is available here.