The Uncertainties of the New Benchmarks Regulation

The draft text of the EU Benchmark Regulation (BMR) was agreed by the EU in November 2015. Since that date, all organizations that administer, contribute to, or use benchmarks in financial instruments and contracts have been trying to understand exactly what the Regulation means for their businesses, and for the financial markets in general. These organizations have been supported in this task by their service providers: companies such as RIMES that are engaged in helping their customers adapt to the BMR regime.

This work has not been easy. BMR is one of the most complex and far-reaching Regulations that the financial sector has seen. The wording of the Regulation is at times opaque and understanding of the consequences of the Regulation have changed over time in light of new information; primarily the draft Regulatory Technical Standards from ESMA.

A case in point concerns whether asset managers blending two or more benchmarks together to create a composite benchmark are considered Benchmark Administrators under BMR. In February 2016, based on the information that was then available (i.e. the draft text of the Regulation) and on the public statements of high-ranking regulators, it was RIMES’ understanding that asset management firms that blend benchmarks would not be considered as Administrators under the Regulation.

Thirteen months on from this, the publication of ESMA’s draft Regulatory Technical Standards in March 2017 provided clarification. It now seems the case that asset managers that blend benchmarks must consider issues surrounding the actual or effective control of the benchmark and any conflict of interest in their provision, as these factors may mean they are considered Administrators under the BMR regime.

What this case makes clear is that the rollout of BMR is characterized by uncertainty and, at times, a lack of clarity. Moreover, this uncertainty persists despite the publication of ESMA’s draft RTS, and it will be many months yet before the full implications of BMR are understood.

In the face of this challenge, firms must take a number of steps to ensure they are as prepared as possible for the enforcement of BMR from January 2018, and that they understand their compliance risk profile to as great an extent as is possible.

As a basic first step, compliance officers and legal teams at buy-side firms must examine the Regulation text in detail, as well as all supplementary ESMA publications. Second, firms must carry out a full inventory of their benchmarks and their benchmarks processes to understand exactly which benchmarks they use and how they use them. This information is fundamental in understanding the firm’s risk exposure to the Regulation.

BMR is one of the most significant challenges facing buy-side firms today. Achieving compliance will not be easy, but it can be helped by gathering as much information as possible; both on the Regulation itself and internal benchmark operations and processes. From there, firms will be able to build a benchmark compliance function that is fit for the more stringent compliance regime BMR is creating.

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, Contact Us.

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