While the EU’s Benchmarks Regulation comes into force on January 1, 2018, benchmark administrators around the world have been given a two-year period of grace in which to achieve compliance. However, a new report by the Asia Securities Industry & Financial Markets Association, and law firm Herbert Smith Freehills, suggests that this may not be enough. According to the report, it is unclear whether the 55 non-European indices traded in Asia, including the Hang Seng Index and Nikkei 225 Index, will have registered under BMR by that time.
The Benchmarks Regulation has been created by the EU to restore confidence in its financial markets following a series of rate-rigging scandals in the region. Under the Regulation, benchmark administrators will need to register with European Regulators before their benchmarks can be used in financial instruments and contracts by buy-side firms in the region. However, in their survey of benchmark administrators in Asia, the Asia Securities Industry & Financial Markets Association and Herbert Smith Freehills found that very few had concrete plans to register under BMR; and that many administrators found the system for doing so poorly defined and complex.
This report makes for concerning reading for buy-side firms that use benchmarks from third-party jurisdictions. BMR has not received much attention in non-European jurisdictions, and as a result many administrators may struggle to achieve compliance in time. Indeed, some providers in key markets such as the US and Asia may not deem the effort worthwhile, and may instead withdraw their benchmarks from the market. Buy-side firms must be aware of this risk, and not only in order to maintain business-as-usual: BMR specifically mandates buy-side firms to have a list of substitute benchmarks for this exact eventuality.
To de-risk their operations, RIMES advises buy-side firms to inventory the benchmarks used in their operations. From this inventory, firms will be able to categorize their benchmarks and flag those that are in danger of being withdrawn from use. Additionally, as buy-side firms look to build a list of substitute benchmarks, they should consider leveraging cloud services to gain access to pre-built lists from providers such as RIMES. This approach will enable firms to achieve compliance more rapidly and, through economies of scale, at a lower cost than in-house development.
As the implementation date for BMR draws near, it is becoming increasingly clear that the Regulation will have a significant impact on the benchmarks market. Buy-side firms need to look at now at how they can mitigate risk stemming from the Regulation, and ensure their operations are not disadvantaged. Working with managed service providers such as RIMES is fast becoming the best way of meeting these aims.
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