Key Developments in the EU Benchmarks Regulation

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 first of the day’s sessions, Dr Joanna Perkins, Chief Executive of the Financial Markets Law Committee (FMLC), summarized some of the key developments in the EU Benchmarks Regulation.

Joanna reviewed the recent history of benchmarks regulation following the Libor rate rigging scandal, and reminded attendees of a central issue surrounding the effective setting of benchmarks: that regulators have been unable to decide how much weight to give to the expert opinion of benchmark setters as a formal benchmark input. In Joanna’s opinion, it is a matter which the EU Benchmarks Regulation has yet to solve. Indeed, in Article 11, which deals with input data, the matter is not addressed at all.

Joanna went on to look at the important question of whether the Regulation would regard buy-side firms which blend benchmarks as benchmark administrators; and therefore oblige them to comply with all relevant terms in the Regulation. In this regard, Articles 2 and 3 are the most important, which set out how the EU defines benchmarks and indices for the purposes of the Regulation. For Joanna, these definitions are so far-reaching they would encompass any publishing of relevant data. The publisher would therefore be considered an administrator and have to comply accordingly.

Joanna also made the point that the Regulation will likely lead to significant costs for benchmark administrators, particularly with regards to oversight, as administrators will need to establish and maintain a permanent and effective oversight function, potentially comprised of users and contributors.

Finally, Joanna addressed the spectre of benchmark withdrawal: the concern that turbulence caused by the Regulation might lead to the withdrawal of major benchmarks, which in turn could lead to companies terminating contracts that rely on these benchmarks. While Joanna admitted that so-called contract frustration remains a possibility, she was optimistic that the Regulator has an eye on the issue. Joanna believes there are enough provisions in the EU Benchmark Regulations for the regulator to keep threatened benchmarks running, or for them to set up substitute benchmarks in the event of a withdrawal.

Joanna’s presentation highlighted just how complex the EU Benchmarks Regulation is and why buy-side firms must start planning how to react to the Regulation as soon as possible.

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