A financial market integrity pillar
The EU Benchmarks Regulation (BMR – EU 2016/1011) is part of the EU’s response to the LIBOR/EURIBOR rigging scandal. The Regulation implements and builds upon the global standards set out in the IOSCO Principles for Financial Benchmarks, which were published in July 2013.
The EU Benchmarks Regulation lays down a regulatory framework for indices used as benchmarks, which is designed to reduce the risk of benchmark manipulation and promote confidence in their accuracy and integrity and that of the financial markets which they underpin.
Regulation of a benchmark is a statement of accuracy, representativeness, transparency and investor protection. It affects both the methodology, the input data and the user group. As a result of the application of a rules-based, robust and reliable methodology, which is rigorous, continuous and capable of validation, resilient, allowing calculation of the benchmark in the widest set of possible circumstances, the resulting benchmark should be reliable and representative of the market or economic reality that the benchmark is intended to measure.
The definition of “benchmark” for the purposes of the Regulation is extremely broad: any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees.
With these objectives in focus, it introduces a regime for the providers (“Benchmark Administrators”) that ensures the accuracy and integrity of benchmarks. Furthermore, the Benchmarks Regulation introduces a code of conduct for contributors of input data specifying contributors’ responsibilities and requires the use of robust and reliable methodologies and sufficient and accurate data. The European Securities and Market Authority (ESMA) coordinates the supervision of Benchmark Administrators by national competent authorities.
An urgent milestone for asset managers, intermediaries, asset owners and investors
When is the deadline?
The BMR regulation enters into force on January 1, 2022 and EU-supervised users of indices, if such use falls within scope of the BMR, have an obligation to use only benchmarks that comply with the EU Benchmarks Regulation. As of the same date, EU users are prohibited from new use of existing non-EU indices and use of new non-EU indices. Existing third-country benchmarks, used within the scope of the regulation, can benefit from a transitional period through December 2023.
Which indices are impacted?
Indices and Benchmarks are not equivalent notions, with the latter requiring the provision by a regulated entity, the Benchmark administrator, on the basis of their intended use. Indices may fall within the scope of the benchmark regulation if they are used for traded financial instruments, for financial contracts and in relations to investments funds, including AIFs – i.e. private market funds – with the purpose of tracking the return, defining the asset allocation of a portfolio, or computing performance fees.
Who is affected?
The Regulation states that any EU supervised entity may use a benchmark or a combination of benchmarks only if it is provided by a regulated administrator. Given its far reaching scope that affects every supervised financial institution in the EU, the Regulation has, in substance, both a direct impact on every non-EU entity interacting with EU supervised entities and an indirect impact on every other entity competing internationally in the financial industry, because of the higher standards imposed on Benchmarks in the EU.
Far reaching implications
UK’s FCA, originally a driving force behind the BMR, in the policy statements of its recent Asset Management Market Study reinforces the requirements for consistency and appropriateness of benchmarks. Among other matters, “the new rules and guidance require fund managers to explain why or how their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund”. The new rules apply to “UK authorised fund managers (in respect of their management of authorised funds) and will also interest others in the investment management industry, including delegated portfolio managers, depositaries of authorised funds, and retail and professional investors, including advisers”.