On November 21, RIMES hosted its third Regulatory Seminar on the topic of the EU Benchmarks Regulation (BMR). In the final session of the day, Will Dibble, Partner at CMS Cameron McKenna, provided an overview of the implications of Brexit in relation to the application of BMR in the UK. What follows is a summary of the points raised during his discussion.
Will started his presentation with a ‘big picture’ overview of BMR, especially as it applies to third-country jurisdictions (which, of course, the UK will become on exiting the European Union). The extra-territorial impact of BMR is vast and denies access to EU markets for any products based on non-compliant benchmarks. At present, third-country administrators are reliant on transitional arrangements, which will come to an end in 2020. During that time, they can seek authorization of their benchmarks for use in the EU through recognition, endorsement or equivalence.
While the market expects BMR to be replicated in UK law following Brexit, a great deal of uncertainty remains, particularly around how UK administrators will achieve recognition under BMR, and what the timeline will be. And putting aside the question of UK access to EU markets, if the UK puts in place an equivalent regime to BMR, third-country administrators would also likely need to be authorized for use in the UK.
Will went through the authorization options for UK administrators considering compliance with BMR. The first, recognition, will only be available for a limited time – until a decision has been made by the EU on equivalence. Recognition is a useful first step as it applies to an administrator and all its benchmarks, whereas endorsement only applies to specific benchmarks.
Significantly, recognition demands that an administrator use a legal representative from a Member State of Reference. As Will pointed out, the representative is an agent of the administrator and is there to perform the oversight function mandated by BMR jointly with the administrator.
Looking at some of the challenges around recognition, Will highlighted the uncertainty regarding the liability of legal representatives. BMR does not mention sanctions in relation to legal representatives and there is a lack of clarity around how liability is allocated between the legal representative and the third-country administrator. Another challenge is that legal representatives must have the expertise to oversee benchmark administration, and there is a notable skills shortage in this area. Finally, administrators might be put off by the fact they have to share the oversight function, seeing it as a loss of control.
When it comes to endorsement, Will highlighted that this path to BMR compliance demands that third-country administrators must demonstrate on an ongoing basis that a specific benchmark complies with standards that are on a level with BMR. Significantly, administrators need to demonstrate an objective reason for the provision of the benchmark – both in the EU and within its own jurisdiction. Will raised the concern that providing this ‘objective reason’ might prove a difficult task.
Finally, Will looked at equivalence. While not an option at present, this will likely be the best way for the UK to gain access to the EU for its benchmarks following Brexit. In the meantime, the market needs some sort of certainty and continuity, and so administrators should weigh up the pros and cons of recognition and endorsement.
Contact us 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: https://www.rimes.com/contact-us/.
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