If there is anything more complex than the EU’s Benchmarks Regulation (BMR) then Brexit has to be a contender. Where the two issues collide, complexity is taken to a whole new level – especially when you throw Libor discontinuance into the mix. The new update from global law firm Mayer Brown on exactly how Brexit and BMR will affect Libor is therefore most welcome.
Under BMR, benchmark administrators must apply to a competent authority for authorization and also register with European Securities and Market Authority (ESMA). With the UK currently a member of the EU, ICE Benchmark Administration (IBA), the administrator of the London Interbank Offered Rate (Libor), is authorized by the FCA; and Libor has been in ESMA’s register since April 27, 2018.
However, Brexit will shake things up dramatically. As Mayer Brown sets out, if the UK leaves the EU without a withdrawal agreement (the so-called ‘no-deal’ scenario) IBA’s authorization under BMR will cease, as the UK will no longer be a member of the EU and there will be no transitional arrangements in place. Importantly, it doesn’t matter that the UK will replicate BMR’s provisions in its legal framework even in the event of ‘no-deal’ as the UK will be outside EU law.
IBA will therefore need to follow one of the routes to BMR authorization laid out for third-country administrators: equivalence, recognition and endorsement. There will be some breathing room in this regard as UK-based benchmark administrators can benefit from Article 51(5) of the Benchmarks Regulation, which says that existing benchmarks from third-country administrators can continue to be used in the EU until December 31, 2019.
Libor is an essential benchmark for capital markets worldwide, so a no-deal scenario would in effect give IBA, regulators and law makers just nine months to find a solution. As the Mayer Brown analysis demonstrates, that might not be an easy thing. Equivalence, for example, won’t be automatic, even if the UK closely mirrors the EU’s regulatory environment; and there’s no way of knowing how long it will take before EU benchmark providers are given access to the EU in a no-deal scenario. Recognition, meanwhile, is untested as a route to compliance and it is thought unlikely that UK administrators could obtain a recognition decision for LIBOR by the end of 2019.
With such a high degree of uncertainty around what will happen, it’s important that benchmark users prepare for all eventualities. A critical piece of work – and work mandated by BMR – is that supervised entities in the EU prepare written plans in case a critical benchmark is discontinued. We advise firms to go further and map all benchmarks used in their firms, including those designated ‘non-critical’ under BMR, to assess what impact their withdrawal would have on their business and to put in place contingency plans.
This may seem like a daunting task, but firms need not do it alone. We’ve developed a bespoke, award-winning service to help firms ready their organizations for BMR, which includes inventorying their benchmark landscape, providing a feed of authorized benchmarks, and helping firms identify replacement benchmarks for those that are materially changed or discontinued.
Contact us to receive more information about RegFocus® BMR, the most advanced benchmarks validation solution on the market, which solves all regulatory obligations under the new Benchmarks Regulation.
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