Following on from the consultation process it launched in June 2017 and January 2018, the UK’s Financial Conduct Authority (FCA) has finalized changes to its Handbook that bring it into line with the EU Benchmarks Regulation (BMR). The FCA’s changes to the handbook remove legacy rules that have been made redundant by BMR and ensure that the regulator is able to supervise benchmark administrators and enforce BMR effectively. BMR has created a new regulatory regime and compliance obligations for firms that administer, contribute to or use benchmarks used in financial instruments and contracts in the bloc.
Significantly, the FCA has made it clear that legacy rules will continue to apply to the administrators of, and contributors to, benchmarks that it already regulates until such a time as these benchmarks are authorized or registered under BMR. All administrators must apply for authorization or registration by the end of the transitional period on January 1, 2020 if they’re to remain compliant. Additionally, the FCA will maintain some domestic rules where they are needed for the supervision of benchmark administrators or contributors, or to enforce BMR. Full details of the changes to the FCA Handbook can be viewed here.
The FCA’s latest intervention highlights the growing complexity around BMR. In the time leading up to the end of the transition period in 2020, benchmark administrators will in effect be subject to two different regulatory regimes depending on whether they are BMR-authorized or not. The first step for firms, therefore, is to understand whether they are considered an administrator under the Regulation and to then decide which path – authorization or registration – is most suitable. The FCA has provided some useful guidance to administrators on this process.
For users of benchmarks, the chief challenge will lie in monitoring the fast-changing benchmarks ecosystem to ensure that the benchmarks they use in financial instruments and contracts are going to be compliant come January 1, 2020. This involves an internal benchmark audit whereby all benchmarks used at the firm are inventoried and assessed against BMR to understand the firm’s overall exposure to risk. From there, firms will need to prepare for future market withdrawal of non-compliant benchmarks by building a list of replacement benchmarks.
The key is for firms to act now. The FCA’s changes to its Handbook signify that the new BMR regime is falling into place and firms no longer have much time to ensure they will be ready when the transition period comes to an end.
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