Since our previous newsletter, the countdown to the enforcement of the EU Benchmarks Regulation (BMR) has gathered pace. It is now clear that buy-side firms must take immediate action to ensure they are ready when the Regulation takes effect on January 1, 2018. BMR, which sets a new standard for benchmark assurance, aims to bolster the reliability of benchmarks used in financial instruments and contracts.
The most significant recent development around BMR came in June, when the European Securities and Markets Authority (ESMA) issued a framework to assist national competent authorities (NCAs) in their selection of banks to be compelled to contribute input data to any critical benchmark in danger of becoming unrepresentative. This is a key development for buy-side organizations which rely on Critical benchmarks such as Interbank Offered Rates (IBORs) or the Euro OverNight Index Average (EONIA).
ESMA’s framework will help bring some certainty to a Regulation that remains highly complex. The scale of this complexity was made apparent in May, when new legal analysis of BMR outlined the challenges that lie ahead.
The analysis focused on whether benchmarks from third-country jurisdictions will remain available in the BMR regime. BMR makes provisions for the acceptability of third-country benchmarks that can prove equivalence, and ESMA has this month published draft Regulatory Technical Standards on the minimum contents for cooperation arrangements between ESMA and NCAs in third countries that have been designated as equivalent under the BMR. However, the latest analysis suggests that equivalence might be hard to achieve, as no country’s regulatory regime comes close to the detail and reach of BMR.
Another area of concern raised in the analysis is around how BMR defines a benchmark. The Regulation views any index made available to the public that is used to price or value a financial instrument or contract as a benchmark. This means that indices used to price contracts, as well as indices used as a bespoke measure for a specific structured derivatives contract, will be considered as benchmarks under the Regulation. Firms that use bespoke or blended benchmarks could therefore be considered as benchmark administrators for the purposed of BMR, and regulated as such.
Despite the remaining uncertainties, local regulators are stepping up their activities around BMR. In the UK, for example, the FCA has recently released two communications on the Regulation in as many weeks. In the first, the FCA urged all relevant stakeholders – including benchmark users – to act immediately to understand how the EU’s Benchmarks Regulation (BMR) will affect their organizations. The second communication provided an update on how the FCA intends to change its Handbook to fit with BMR. The proposed changes to the Handbook are largely to ensure that certain rules do not apply to benchmark activities where they would overlap with BMR.
In the light of these events, RIMES is advising buy-side firms to start work now on understanding their liabilities under BMR. As a first step, firms need to inventory their indices, and run an analysis against the stipulations of BMR to see whether these will be classified as benchmarks. For those that are, firms need to put in place a mechanism to ensure that these benchmarks will be compliant from January 1, and provided by registered administrators. Buy-side firms should also source replacement benchmarks for any benchmarks that look in danger of being discontinued because of BMR.
Firms that use bespoke and blended indices need to go a step further and find out whether they will be classified as an administrator under BMR. If so, they will need to put in place an oversight function capable of providing robust compliance reports. This will be a significant piece of work, and firms should look to third-party specialist solutions to help assist their compliance transformation.
RIMES recently conducted a BMR Seminar in London to help buy-side firms better understand their obligations under BMR. Click here to watch the seminar in full.