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What is the Benchmarks Regulation?

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The European Union has started to enforce its Benchmarks Regulation (BMR) on January 1, 2018 in order to regulate the provision of, contribution to and use of a wide set of benchmarks. The BMR has been created to:

  • Manage conflict of interest inherent to certain investment processes.
  • Prevent supervised entities (including asset managers, asset owners and insurance companies) from using unregulated benchmarks in the EU.
  • Improve governance and controls over the benchmarks process.

Let’s take a look at the regulation and what you need to know to become compliant.

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What is BMR Icon

What is the Benchmarks Regulation?

The BMR imposes new requirements on firms that provide, contribute to or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices.

Benchmarks and Indices Defined

The BMR defines an index as a figure that is publicly available and is regularly determined, either by applying a formula or other calculation or making an assessment on the basis of the value of one or more underlying assets/prices (including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys).

An index becomes a benchmark within the scope of the BMR where:

  • It is used to determine the amount payable under a financial instrument or financial contract, or the value of a financial instrument.
  • It is used to measure the performance of an investment fund for the purpose of tracking the return, defining the asset allocation or a portfolio, or computing the performance fees.

How the BMR May Affect You:

You may become a benchmark administrator if you provide indices that are used in:

  • Financial instruments traded on trading venues or via systematic internalisers in the EU.
  • Mortgage or consumer credit contracts, or investment funds.

You may become a benchmark contributor under the Regulation if you are an authorised person and you:

  • Contribute input data that is not readily available to the administrator, and
  • Provide the input data for the purpose of a benchmark determiniation.

You may become a benchmark user and be subject to additional requirements if you are supervised under MiFID II, CRD IV, UCITS or one of the other EU regulations as specified in Article 3(1)(17) and you:

  • Issue a financial instrument that references an index.
  • Determine the amount payable under a financial instrument or a mortgage or consumer credit contract by referencing an index
  • Are a party to a mortgage or consumer credit contract that references an index.
  • Provide a borrowing rate calculated as a spread or mark-up over an index or a combination of indices and that is solely used as a reference in a consumer credit contract to which the creditor is a party.
  • Measure the performance of an investment fund through an index either to track the return of the fund or to define its asset allocation.
Benchmark Administrator IconBenchmark Contributor IconBenchmark User Icon
Critical Benchmarks Icon

Critical benchmarks

Where the value of contracts underlying the benchmark is at least €500bn, or where a benchmark has been recognised as critical in a Member State.

Significant Benchmarks Icon

Significant benchmarks

Where the value of contracts underlying the benchmark is at least €50bn, or where there are no or very few market-led substitutes and there would be an impact on financial stability if the benchmark ceased to be produced.

Commodity Benchmarks Icon

Commodity benchmarks

Where the underlying asset of the benchmark is a commodity as defined by MIFID II. Commodity benchmarks are subject to the requirements set out in Annex II of the Regulation unless they are regulated data benchmarks, or are based on submissions the majority of which are supervised entities. The articles relating to significant and non-significant benchmarks do not apply to commodity benchmarks.

Regulated Data Benchmarks Icon

Regulated data benchmarks

Where the input data to the benchmark is provided directly from regulated venues. Certain provisions of the Regulation do not apply to regulated data benchmarks, and they cannot be classified as critical.

Interest Rate Benchmarks Icon

Interest rate benchmarks

Where the benchmark is determined on the basis of the rate at which banks may lend to, or borrow from, other banks or agents in the money markets. Interest rate benchmarks are subject to the requirements set out in Annex I of the Regulation. The articles relating to significant and non-significant benchmarks do not apply to interest rate benchmarks.

Non-Significant Benchmarks Icon

Non-significant benchmarks

Where the value of contracts underlying the benchmark is less than €50bn, and the benchmark is not a commodity or interest rate benchmark.

BMR Non-Compliance Penalties

Penalties For Non-Compliance With the BMR

Authorities can impose financial and/or non-financial penalties for Financial Benchmarks Regulation infringement including cease and desist orders, €500,000 fine for individuals in breach of requirements, or €1 million or 10% of annual income for companies in breach of requirements.

If you are using Benchmarks, under BMR you must:

  • Ensure the supplier of your benchmark is a registered administrator under BMR.
  • Ensure the benchmark is administrated by an official administrator based in the EU.
  • Ensure you have robust plans in place to substitute a benchmark in the case of material change to or cancellation of a benchmark.
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Days Since BMR Came into Effect: Are You Compliant?

Days
1
3
6
5
Hours
0
5
Minutes
3
2
Seconds
4
3