While the EU’s Benchmark Regulation (BMR) has its genesis in Europe, the Regulation is equally important to benchmark Administrators, Contributors and Users in the US. Such is the assessment of Joe Kavanagh, CFA and Head of Performance Measurement and Risk Analysis at KBI Global Investors, which he made during the recent FTF Performance Measurement Americas conference. BMR, which comes fully into force in January 2020, brings in a more stringent regime for the administration and use of benchmarks used in financial instruments and contracts.
Kavanagh’s intervention on this subject is critical as there is still some uncertainty in the US financial sector with regards to whether firms there need to be concerned with BMR at all. As Kavanagh rightly points out, BMR is of direct consequence to any US firms that sell products into the EU, or have clients based in the region. If these US organizations publicize investment portfolios against performance benchmarks, they will need to comply with the Regulation.
Indeed, BMR explicitly lists the obligations of firms from outside the EU in its provisions for third-country jurisdictions. Under these provisions, any Administrator from outside the EU that provides benchmarks or indices for use in the region will be required to comply with BMR if their benchmarks/indices are to continue to be used in the EU after January 1, 2020.
Administrators can achieve compliance in three ways: 1) if their national competent authority achieves equivalence with the EU’s Regulation, 2) if they establish a legal representative in the EU and achieve recognition through an EU competent authority, or 3) they achieve endorsement from an EU competent authority through an EU-based benchmark Administrator. US benchmark Administrators wishing to continue their activities in the EU after 2020 should start work now on understanding which approach would be best for their firms. Deloitte has recently published some detailed advice on this area, which may help in this task.
Meanwhile, investment firms in the US will need to take care that they do not use unapproved benchmarks in the materials they make publicly available in the EU. This means that firms will need to create inventories of their benchmarks to understand which are regulated by BMR and act accordingly. For regulated benchmarks, firms will also need to create a list of substitute benchmarks for use in case of material changes to existing benchmarks or their withdrawal from market.
Firms in the US that do business in the EU therefore have a choice to make: wind down their European activities or seek compliance with BMR. This is, of course, no choice at all: in a globalized financial market all asset managers, investment funds and other buy-side entities will need to rely on EU benchmarks if they are to have in place the product diversity clients expect. The good news is that compliance with BMR is not as complex as it first seems. By partnering with managed data service providers such as RIMES, firms can quickly implement the new capabilities required by the Regulation, at low cost, and with minimal disruption to business.
RIMES will discuss other regulatory developments at its upcoming RegTech Market Surveillance Conference, which will take place in New York on June 13. To register, email events@rimes.com.
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