European Union: EU Benchmark Regulation: Our Translation, Your Transition And The Timeframe

Read the Original Blog  Here

The European Commission's Regulation on indices used as financial benchmarks in financial instruments and financial contracts (the Regulation) goes live on 1 January 2018. It forms part of the EU's response to a series of high profile investigations in recent years into the alleged manipulation of key financial benchmarks, including LIBOR. These investigations raised concerns over the reliability and integrity of financial benchmarks, which underpin transactions worth trillions of dollars. The Regulation aims to reduce the risk of manipulation, bolster the reliability of benchmarks administered and ultimately provide a safer environment for the use of benchmarks in the EU.

As the countdown to the Regulation begins, we examine some key considerations for firms in the upcoming weeks and months.

What is an EU Benchmark?

An important starting point is for EU and non EU firms to consider whether a benchmark or index that they administer, contribute to, or use falls within the scope of the Regulation. Considering that there has been much industry debate regarding how this provision should be interpreted, we encourage firms to apply the following decision tree (based on Regulation Article 3) in order to identify whether a figure determined by the firm should be considered an EU index or an EU benchmark :

  1.  Is the figure "published" or "made available to the public"1 ?
    • NO - NOT an EU BMR Index
    • YES. Go to the next question (2)
  2. Is the figure "regularly determined"?                                                                                                                                                                                                    
    • NO - NOT an EU BMR Index        
    • YES, the figure is an "Index". Go to the next question (3) 
  3. Is the index used to determine: (i) the amount payable under a "financial instrument2" or a "financial contract"; or (ii) the value of a "financial instrument"?                                                                                                                                                                                                                                               
    • NO. Go to the next question (4)
    • YES – EU BMR BENCHMARK
  4. Is the index used to measure the performance of an "investment fund" with the purpose of: (i) tracking the return of such index; or (ii) defining the asset allocation of a portfolio; or (iii) computing the performance fees?                                                                                                                                
    • NO - NOT an EU BMR Benchmark.
    • YES - EU BMR BENCHMARK                                                                                                                                                                             

Timeline and Transitional Arrangements

The second step is to consider the timeline and transitional arrangements. Importantly, the Regulation also applies to non-EU Supervised entities that administer financial benchmarks which are used by EU Supervised entities. While the Regulation applies from 1 January 2018, "existing" EU Administrators as well as non-EU Administrators currently providing benchmarks used by an EU Supervised Entities, benefit from transitional provisions in the text.

Existing EU Administrators

EU Administrators providing benchmarks up to 1 January 2018 will have until 1 January 2020 to apply to their EU National Competent Authority ("NCA") for authorisation or registration. During this time, they can continue to administer benchmarks unless their application is rejected by the NCA (administrators can reapply for authorisation if rejected).

As we close on 2017, we encourage these firms to consider the commercial impact of the timing of their application. In the meantime, administrators should take the initiative to develop a market outreach programme, providing progress alerts and updates regarding their timeline for compliance which can be distributed to EU supervised entities.

Non EU Administrators

Non EU Administrators ("Third Country Administrators") providing indices pre 20203 and used by EU supervised entities, can continue to do so until 1 January 2020. During the transitional period, the Third Country Administrator must apply to ESMA either for Endorsement of their specific benchmarks, or Equivalence Recognition of their activities as a benchmark administrator. If approved, the administrators can carry on providing benchmarks used by the EU supervised entity.

If the application is rejected, and the benchmark was provided before 2018, the EU supervised entities can continue to use the benchmark until 1 January 2020, but not beyond.

Considering the lack of practical guidance around the application process, we encourage Third Country Administrators to identify the benchmarks used in EU (traded on a trading venue - TOTV) before 1 January 2018. This process may be onerous for Third Country Administrators providing several benchmarks to EU supervised entities, however it forms the basis upon which they can:

  1. Define and establish their strategy for compliance with the Regulation; and
  2. Apply the Transitional Provision, preventing any market disruption.

Moreover, we encourage Third Country Administrators to consider their progress in relation to adherence to the International Organization of Securities Commissions (IOSCO) Benchmarks Principles. Regardless of whether Third Country Administrators provide or will provide benchmarks to EU supervised entities or not, independent assurance over compliance with the IOSCO Principles has been, and continues to be, important in sending a message to the market on the quality and robustness of administrators' benchmarks. Furthermore, certified compliance with IOSCO Principles is a pre-requisite to gaining Recognition for the purposes of the Regulation.

Whatever authorization path the administrators will take over the coming months, they should ensure that they establish a communications program which allows them to provide updates on their progress and timelines to the regulators and their users.

Users of EU Benchmarks

Whilst much has been debated and considered in recent times regarding the requirements for benchmark administrators and contributors, much less attention has been paid to the impact on users of financial benchmarks.

EU Supervised Entities are entitled only to make use of financial benchmarks from an EU Authorised Administrator, or a Third Country Administrator that is either recognized, or endorsed, under the Regulation, after 2020. In addition, users of financial benchmarks will have to consider repapering the contracts (post 2018) to identify alternative benchmarks.

We encourage users of benchmarks to undertake in depth analyses of their use of benchmarks, and engage with benchmark administrators, in order to determine the extent to which they (benchmark users) can continue to rely upon these benchmarks.

Applications to EU national competent authorities and ESMA role

ESMA's Level 2 RTS4 , issued on 29th March 2017 includes guidance on the specific information required in the application forms for the assessment for authorization and/or registration. EU NCAs have published their own consultation papers for guidance on applications and currently the applications forms are available on their websites5.

From a UK perspective, the Financial Conduct Authority (FCA) opened the window to submit the draft applications from 1 October 2018, with an invitation to firms to obtain feedback before the year end on applications received prior to this date. The FCA has strongly encouraged all the UK administrators to submit their draft application as soon as possible, this will allow time for an in-depth review offering detailed feedback that can help to submit a final version aligned with the FCA expectations.

The Commission recently proposed that ESMA becomes the direct supervisor of critical benchmarks and third country benchmark administrators, and that the ESMA assumes responsibility for monitoring third-country equivalence decisions. This would include any equivalence decisions that could be granted to the UK under certain provisions of financial regulation post-Brexit. Administrators should monitor further developments regarding these proposals.

Conclusion

There is much still to do, whether you are an existing EU or Third Country Administrator, a new entrant to benchmark Administration, or importantly, an EU Supervised Entity that uses financial benchmarks. As 2017 comes to a close, the commercial impact of the Regulation is becoming much more apparent, with quality standards required by the Regulation having the potential to tip the balance and drive the strategy of compliance by administrators, and selection by users.

Footnotes

1. Whilst there is no clear definition of what constitutes whether a figure is "made available to the public", we would encourage firms to consider the methods in which figures are distributed to the market (e.g. streaming platform, routine publication), and the commercial basis upon which the figures are provided (e.g. free of charge, through a licensing agreement).

2. The Regulation defines "financial instruments" as the MiFID2 financial instruments that are traded on a trading venue (TOTV) or available via a systematic internaliser (SI). Both SI and TOTV concepts are result of MiFID2 regulation that is expected to kick in January 2018, with one year of delay. This scenario is creating high uncertainty, with the risk to not be able to identify financial instruments existing prior to 2018.

3. ESMA published additional Q&A on the 8th November 2017 which clarify how the transitional provisions under the European Benchmarks Regulation ("EBR") apply to third country benchmarks. https://www.esma.europa.eu/sites/default/files/library/esma70-145-114_qas_on_bmr.pdf

4. https://www.esma.europa.eu/sites/default/files/library/esma70-145-48_-_final_report_ts_bmr.pdf

5. FCA: https://www.fca.org.uk/markets/benchmarks/eu-regulation; AMF: http://www.amf-france.org/en_US/Reglementation/Dossiers-thematiques/Epargne-et-prestataires/Divers-gestion-d-actifs/Utilisation-des-indices-de-r-f-rence---l-AMF-int-gre-de-nouvelles-bonnes-pratiques-dans-sa-doctrine

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions